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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

Is a graduate student performing research an employee?

In Rizak v. M.N.R. (2013 TCC 273), the Tax Court of Canada considered this question and determined, on the facts, that a graduate student performing research at the University of British Columbia was an employee for the purposes of the Employment Insurance Act.

In Rizak, the taxpayer was a grad student in neuroscience at UBC. Before starting his studies, the taxpayer was hired as an employee by a professor who needed assistance with lab research. After his grad studies commenced, the taxpayer performed the same lab research but, instead, received an annual stipend rather than an hourly wage. After he withdrew from the grad program, the taxpayer was once again hired as an employee to perform the same lab research for several months.

Subsequently, the Minister of National Revenue determined the taxpayer’s work while he was a grad student was not insurable employment for the purposes of subsection 5(1) of the Employment Insurance Act. The taxpayer appealed to the Tax Court.

The Tax Court considered a collection of cases on the classification of graduate students and post-doctoral fellows (see Bekhor v. M.N.R., 2005 TCC 443; Chabaud v. The Queen, 2011 TCC 438; Caropreso v. The Queen, 2012 TCC 212; Hammell v. M.N.R., [1994] T.C.J. No. 921; Hospital for Sick Children v. M.N.R., [1993] T.C.J. No. 388; Nabet v. M.N.R., [1999] T.C.J. No. 79; and Charron v. M.N.R., [1994] T.C.J. No. 47). The parties had also referred to the traditional four-in-one test from Wiebe Door Services Ltd. ([1986] 3 F.C. 553 (C.A.)) and Sagaz Industries Canada Inc. (2001 SCC 59) regarding the classification of a worker. In this case, however, the Tax Court stated,

I am not required to determine whether Mr. Rizak was an employee or an independent contractor as neither party took the position that Mr. Rizak was an independent contractor. I simply have to determine whether the dominant characteristic of the payments that Mr. Rizak received was compensation for the work he did or student assistance. I do not find [the Wiebe Door factors] to be useful in reaching that determination.

The Tax Court concluded that the dominant characteristic of the stipend paid to the taxpayer was compensation for work and, thus, he was an employee. There was a clear correlation between the stipend and the work performed by the taxpayer and he received the money because he agreed to work in the professor’s lab. The taxpayer was required to do the specific work expected of him. Further, the taxpayer performed the same work as an employee both before and after his time as a grad student.

In obiter, the Tax Court also noted that, for the purposes of the Income Tax Act, the taxpayer had earned employment income rather that exempt (or partially exempt) scholarship income and the Court, therefore, suggested that the taxpayer had tried to “have his cake and eat it too” by claiming not to be an employee for income tax purposes while at the same time claiming to be an employee for employment insurance purposes.

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Is a graduate student performing research an employee?

Canada’s Taxpayer Ombudsman Addresses Fear of Reprisal

In the August 2013 edition of Perspectives, Taxpayer Ombudsman J. Paul Dubé highlighted the recent addition of Article 16 to the Taxpayers’ Bill of Rights protecting taxpayers against any possibility of reprisals by the CRA.

Previously, in June 2013, Gail Shea, then-Minister of National Revenue, and Mr. Dubé announced the addition of Article 16 to the Taxpayers’ Bill of Rights:

16. You have the right to lodge a service complaint and request a formal review without fear of reprisal.

In the newsletter, Mr. Dube states,

This right means that if you lodge a service complaint and request a formal review of a CRA decision, you can be confident that the CRA will treat you impartially, and that you will receive the benefits, credits, and refunds to which you are entitled, and pay no more and no less than what is required by law. You should not fear reprisal.

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Canada’s Taxpayer Ombudsman Addresses Fear of Reprisal

Canada Revenue Agency provides update on Rulings and GAAR at Toronto Centre CRA & Professionals Group Breakfast Seminar

On June 6, 2013, at the Toronto Centre CRA & Professionals Breakfast Seminar, the Canada Revenue Agency discussed (a) recent developments at the Income Tax Rulings Directorate and (b) the process through which the General Anti-Avoidance Rule in section 245 of the Income Tax Act may be applied in the course of an audit.

Income Tax Rulings Directorate Update

Mickey Sarazin, Director General of the CRA’s Income Tax Rulings Directorate in Ottawa, presented on recent developments at Rulings. A brief overview of the issues he discussed is as follows:

  • Rulings continues its efforts to reduce “red tape”. Specifically, Rulings is seeking to:
    • make its tax information accessible and clear,
    • update its technology,
    • provide a “Tell us once” service standard,
    • reduce reporting requirements,
    • increase timeliness of its rulings.
  • Rulings will be unveiling pre-ruling consultations, which will allow taxpayers to meet with Rulings to discuss potential transactions before a formal ruling application is filed.
  • Rulings has started internal cross-country education sessions to raise awareness about its centres of expertise and certain subject areas.
  • By Fall 2013, Rulings will have added 26 new employees.
  • Hot issues by Division include:
    • Reorganizations and Resources Division – What transactions may be included in a “series of transactions” under subsection 55(2) of the Act.
    • Business/Personal Division – Whether certain arrangements are qualifying private health services plans.
    • International Division – Foreign affiliate dumping rules, upstream loans, and foreign entity classification.
    • Financial Institutions and Trusts Division – Real estate investment trusts and the prohibited investment rules.

The GAAR Process

Yves Moreno, Manager, Income Tax Rulings Directorate, and Suzanne Saydeh, Manager, GAAR and Technical Support Section at the Aggressive Tax Planning Division of the International and Large Business Directorate and member of the CRA’s GAAR Committee, presented on the process regarding the application (or potential application) of the GAAR.

  • Typically, an auditor in a local Tax Services Office will identify a transaction (or series of transactions) to which the GAAR may apply. In addition, the Aggressive Tax Planning Division may identify potential transactions/facts in the course of a review of applications for clearance certificates, rollover transactions, or foreign reporting information. The Aggressive Tax Planning Division may also review certain aggressive transactions with a view to identifying other similarly-situated taxpayers who may have undertaken similar transactions. 
  • The auditor will collect the relevant facts surrounding the transaction (or series of transactions). The auditor will draft a proposal letter that will include a detailed analysis of the potential application of the GAAR. The auditor will invite the taxpayer to provide a response to the proposal letter.
  • Once the auditor receives the taxpayer’s representations, the auditor will make a referral to the Aggressive Tax Planning Division. The referral will include the auditor’s proposal letter, the taxpayer’s representations, the auditor’s response (if any), and any other information that may be relevant to the file (i.e., statute-barred years, etc.).
  • Where the GAAR would be the primary basis of the assessment and there is a “new issue”, the referral is made before the proposal letter is issued to the taxpayer. Where the GAAR would be a secondary basis of the assessment, the referral is made before issuing the assessment.
  • The Aggressive Tax Planning Division is the “gatekeeper” that seeks to ensure the consistent application of the GAAR. It does not “rubber stamp” the referrals, but performs its own analysis in consultation with other CRA Divisions, the Department of Finance, and the Department of Justice. Once its analysis is complete, the Aggressive Tax Planning Division determines whether the matter should be referred to the GAAR Committee.
  • If the Aggressive Tax Planning Division’s view is that the GAAR may apply, the file is referred to the GAAR Committee. If the Aggressive Tax Planning Division’s view is that the GAAR does not apply, it will provide that view to the auditor without referral to the GAAR Committee.
  • For files referred to the GAAR Committee, if there is a “new issue”, the Aggressive Tax Planning Division will draft a referral. If there are no “new issues”, the Aggressive Tax Planning Division will provide a recommendation to the GAAR Committee.
  • The referral to the GAAR committee includes the auditor’s views, the taxpayer’s representations, and the Aggressive Tax Planning Division’s views.
  • The GAAR Committee comprises members from the CRA, Department of Finance and Department of Justice. The GAAR Committee meets periodically to consider the referrals. The Committee members consider the file beforehand, and the meetings allow the committee members to discuss and develop a view on the matter.
  • (As an aside, the CRA stated that it does not believe that the materials and deliberations of the GAAR Committee are subject to disclosure under the Access to Information Act (see, in particular, sections 21 and 24 of that Act)).
  • The GAAR Committee will provide a recommendation on the application of the GAAR in a particular case.

The CRA also provided the following statistics:

  • Since 1988, 1,125 files have been referred to the GAAR Committee. Of those files, the GAAR Committee has recommended that the GAAR be applied in 865 files. Of those files, the GAAR was the primary basis of assessment in 378 files, and a secondary basis of assessment in 487 files.
  • 52 files have been litigated. Of these cases, the Crown and the taxpayer have each won 26 cases.
  • 75 percent of the cases that have been litigated focused on whether there was misuse or abuse of the Act (or another statute).
  • Since the Supreme Court’s decision Canada Trustco Mortage Co. v. The Queen (2005 SCC 54), the Crown has been successful in 18 cases, and the taxpayer has been successful in 13 cases. The CRA attributes this to its better understanding of the interpretation and application of the GAAR.

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Canada Revenue Agency provides update on Rulings and GAAR at Toronto Centre CRA & Professionals Group Breakfast Seminar

Just as Intended: 1392644 Ontario Inc. et. al. v. The Queen

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.

The Federal Court of Appeal has considered the role of intent in the classification analysis in Wolf v. The Queen, Royal Winnipeg Ballet v. The Queen, City Water International Inc. v. M.N.R., Combined Insurance Co. of America v. M.N.R.National Capital Outaouais Ski Team v. M.N.R., Kilbride v. The Queen and TBT Personnel Services v. M.N.R. 

In Lang and Lang v. M.N.R., Chief Justice Bowman of the Tax Court of Canada reviewed the underlying principles and stated that (i) intent is a test that cannot be ignored but its weight is as yet undetermined, and (ii) trial judges who ignore intent stand a very good chance of being overruled by the Federal Court of Appeal.

In the June 6, 2013 issue of Tax Topics, I discuss the Federal Court of Appeal’s recent decision in 1392644 Ontario Inc. et. al. v. The Queen, where the Court clarifies (i) the role of intent and (ii) the manner in which the classification analysis should be undertaken.

Just as Intended: 1392644 Ontario Inc. et. al. v. The Queen

The lighter side of tax opinions

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!

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The lighter side of tax opinions

FCA provides guidance on role of intent in determining status of worker

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.

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FCA provides guidance on role of intent in determining status of worker

Nuances of a tax appeal make it unlike a typical civil trial

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.

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Nuances of a tax appeal make it unlike a typical civil trial

CRA Provides Update on Audit Priorities and Activities

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.)

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CRA Provides Update on Audit Priorities and Activities

The Queen v. GlaxoSmithKline Inc. to be released tomorrow morning: First transfer pricing case heard by the Supreme Court of Canada

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.

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The Queen v. GlaxoSmithKline Inc. to be released tomorrow morning: First transfer pricing case heard by the Supreme Court of Canada

Gross Negligence and Settlement Offers

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.

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Gross Negligence and Settlement Offers