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Mac’s: Quebec CA Affirms Denial of Rectification

In Mac’s Convenience Stores Inc. v. Canada (2015 QCCA 837), the Quebec Court of Appeal affirmed a lower court decision (2012 QCCS 2745) denying rectification of corporate resolutions that had declared a dividend that unintentionally put the company offside the “thin-cap” rules in subsections 18(4)-(8) of the Income Tax Act.

Facts

Mac’s, an Ontario corporation, was a wholly-owned subsidiary of Couche-Tard Inc. (“CTI”). In April 2005, Mac’s borrowed $185 million from Sidel Corporation, a related Delaware corporation.

In April 2006, Mac’s participated in several transactions with various related entities, including the declaration of a $136 million dividend on the common shares held by CTI. A similar series of transactions had been undertaken in 2001. However, in 2006, Mac’s professional advisors failed or forgot to take proper account of the $185 million owed by Mac’s to Sidel.

While the $136 million dividend itself was generally without tax consequences, the dividend had the effect of putting Mac’s offside the (then) 2:1 ratio in the “thin-cap” rules in the Income Tax Act. This resulted in the reduction of deductible interest paid by Mac’s to Sidel in the years following the dividend payment (i.e., 2006, 2007 and 2008).

Rectification

After Mac’s was reassessed by the CRA to disallow the interest deduction, Mac’s sought rectification of the corporate resolution declaring the dividend, and additionally sought to substitute a reduction of its stated capital and the distribution of cash to CTI. This would have had the same effect of paying an amount to CTI while maintaining the proper ratio for interest deductibility.

The Quebec Superior Court dismissed the application on the basis that the Mac’s directors never had any specific discussions regarding the deductibility of interest on the Sidel loan after the payment of the dividend. The various steps in the 2006 transactions reflected the intentions of the parties, and thus there was no divergence between the parties agreement and the documents carrying out the transactions.

Appeal

The taxpayer appealed to the Quebec Court of Appeal. The Court described the taxpayer’s position as not invoking any error in the lower court judgment but simply alleging that, if the taxpayer’s advisors had made a mistake, then the lower court decision must be reversed on the basis of the Supreme Court of Canada’s decision in Quebec v. Services Environnementaux AES Inc. (2013 SCC 65) (“AES“) (see our previous post on AES here).

The Court of Appeal stated that it understood the Supreme Court’s decision in AES to stand for the proposition that parties who undertake legitimate corporate transactions for the purpose of avoiding, deferring or minimizing tax and who commit an error in carrying out such transactions may correct the error(s) in order to achieve the tax results as intended and agreed upon. The Court of Appeal cautioned that AES does not sanction retroactive tax planning.

In the present case, the Court of Appeal held there was no common intention regarding the “thin-cap” implications of the dividend payment, and thus there was no agreement that should be given effect by the courts.

The Court of Appeal held there was no error by the lower court and dismissed the taxpayer’s appeal.

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Mac’s: Quebec CA Affirms Denial of Rectification

Ironside: TCC Orders Hearing of Question on Rule 58 Motion

In Ironside v. The Queen (2015 TCC 116), the Tax Court allowed the Crown’s Rule 58 motion for a determination of a question of law before the hearing, namely whether the taxpayer was estopped from litigating an issue that had been adjudicated in an earlier Tax Court decision.

In the prior case (Ironside v. The Queen (2013 TCC 339)), the taxpayer had incurred legal and professional fees to defend himself against allegations of committing improper disclosures after being charged in June 2001 by the Alberta Securities Commission. The taxpayer sought to deduct such fees in the 2003 and 2004 tax years.

The Tax Court concluded that the taxpayer’s legal and professional fees had not been incurred to gain or produce income from his chartered accounting business, rather such expenses were personal in nature and were incurred to protect his reputation in the oil and gas industry. The Tax Court dismissed the taxpayer’s appeal.

Subsequently, the taxpayer sought to make the same deductions in the 2007, 2008 and 2009 tax years. The CRA reassessed to deny the deductions, and the taxpayer again appealed to the Tax Court.

In its Reply, the Crown raised the issue of whether “the appeal or a portion of it is barred by application of the doctrine of issue estoppel or is otherwise an abuse of the process of the Court”. The Crown then brought a motion for an order pursuant to Rule 58 of the Tax Court of Canada Rules (General Procedure) for a determination of a question prior to the appeal:

Whether the Appellant is barred from litigating within proceeding 2014-1619(IT)G whether the legal and professional fees paid to defend himself in Alberta Securities Commission proceedings and the subsequent appeal are deductible as amounts incurred to gain or produce income from a business or property, on the basis that the characterization of such fees has been previously adjudicated upon and therefore the doctrines of issue estoppel and or abuse of process operate to bar re-litigation of the issue.

The Tax Court noted that Rule 58 contains a two-step process. At the first stage, the Tax Court must determine whether the question posed by the moving party is an appropriate one that should be heard in a subsequent hearing (the second stage).

At the first stage, three elements must exist:

  1. The question proposed must be a question of law, fact, or mixed fact and law;
  2. The question must be raised in the pleadings; and
  3. The determination of the question may dispose of all or part of the appeal, may substantially shorten the hearing, or may result in substantial cost saving.

If all of these elements are present, the Court may set a hearing of the proposed question before a motions judge prior to the hearing of the appeal.

In the present case, the Tax Court held that all three requirements were satisfied. The Court stated,

[12] Clearly, there is the potential that a determination of this question may, according to the materials I have before me and the submissions I heard, dispose of part of the appeal and I need only be satisfied that it “may” so dispose of some of the appeal. I do not have to be absolutely convinced that it will do so in order to refer the question to a Stage Two determination prior to the hearing. If part of the appeal is disposed of, it follows that the proceeding will be substantially shortened. This is precisely the type of question that Rule 58 is meant to target.

The Tax Court ordered that the Crown’s question be set down for a hearing for determination by a motions judge and that certain evidence be presented at the determination (i.e., the pleadings from both appeals, and the Tax Court’s decision in Ironside v. The Queen (2013 TCC 339)).

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Ironside: TCC Orders Hearing of Question on Rule 58 Motion

Crowdfunding: Update From the CRA

In a short technical interpretation (CRA Document 2015-0579031I7 “Crowdfunding” (April 1, 2015)), the CRA has restated its views on the tax treatment of amounts raised via crowdfunding arrangements (see our previous post here).

The CRA stated that amounts received by a taxpayer under a crowdfunding arrangement could represent a loan, capital contribution, gift, income or a combination thereof. The CRA will evaluate each situation on a case-by-case basis.

The CRA stated that, in its view, where funds are received by a taxpayer for the development of a new product and the taxpayer carries on a business or profession, the funds will be taxable income unless the taxpayer can establish that such funds are a loan, capital contribution or other form of equity. The CRA noted that any reasonable costs related to the crowdfunding arrangements would likely be deductible in computing that income.

The CRA noted that, in Canada, crowdfunding activities typically do not involve the issuance of securities, but that some securities regulators may be considering changes to existing regulatory rules. The CRA will evaluate the income tax consequences if such regulatory changes take place.

Finally, the CRA noted that the subject of crowdfunding is briefly addressed in Folio S3-F9-C1 “Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime” (April 3, 2015) in respect of whether such amounts may be a gift by a donor. The CRA provided an example from the Folio:

Example 2

Assume a business uses crowdfunding as a method of raising funds for the development of a new product and the contributors do not receive any form of equity. The amounts received by the business would be included in its income pursuant to subsection 9(1). 

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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Crowdfunding: Update From the CRA

TCC: Unpaid Dividend Refund Is Not a Refund

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

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

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

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

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

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

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

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

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TCC: Unpaid Dividend Refund Is Not a Refund

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

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

An Overview of E-Services for Tax Professionals and Businesses

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

My Account

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

My Business Account

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

Represent a Client

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

Mobile Apps

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

Non-Resident Taxation in Canada – Regulation 102/105

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

Reduce Red Tape

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

R102J and R102R Waivers

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

Short Waivers Granted

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

Secondments

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

Updates in Case Law and Administrative Policy

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

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

CRA: Financial Tools for Canadian Startup Companies

On November 26, 2014, the Canadian Government partnered with Startup Canada to convene Startup Canada Day on the Hill.

Minister of National Revenue Kerry-Lynne Findlay spoke at the event and highlighted the strategies the CRA has implemented to assist startup companies across the country.

Startups have bright, innovative founder teams, but many lack the financial expertise, time, and money required to maintain adequate financial records. This may seem insignificant in the short-term, but this will become increasingly important when attracting investors and in dealing with the CRA.

Minister Findlay stated that, with this reality in mind, the CRA has worked toward reducing the red tape associated with starting and running a business in Canada. In November 2012, 52 small business owners and 91 small business service representatives and bookkeepers participated in meetings across the country to identify issues stemming from federal rules and regulations.

How is the CRA helping Startups?

  1. Through the operation of a secure online self-service portal, available 24/7 through which many different kinds of transactions can be completed, including managing banking information and filing tax returns replacing the need to keep track of copious amounts of paper;
  2. Through the development of the Small Business Checklist which includes user-friendly and detailed information on starting, maintaining and winding up a business;
  3. Through the Business Tax Reminders App, created in consultation with small and medium-sized business owners, which allows businesses to create reminders for when their various financial payments are due; and
  4. Through the Liaison Officer Initiative which provides in – person support to businesses at key stages in their growth cycle in an effort to avoid common tax pitfalls, among other things, that would cost them in the future.

Minister Findlay stated that, in the CRA’s view, these tools provide a solid starting point for tax compliance so company founders can focus on what’s most important to them – making their business grow.

As part of the Government’s commitment to consult with businesses every two years, the CRA recently completed another red tape reduction consultation process in November. Results should be available in the Spring 2015.

A version of this post was originally published on Dentons’ Tech Startup Centre blog

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CRA: Financial Tools for Canadian Startup Companies

CRA Announces Collaboration with CPA Canada

As expected, the CRA has formally announced the details of its collaborative efforts with CPA Canada.

The CRA recently spoke about this collaboration at the Toronto Centre CRA-Tax Professionals breakfast seminar.

The CRA news release, which is titled “Harper Government solidifies partnership with Canada’s Professional Accountants”, states,

The new Canada Revenue Agency (CRA)-Chartered Professional Accountants of Canada (CPA Canada) Framework Agreement was formally signed by Andrew Treusch, Commissioner of Revenue and Chief Executive Officer of the CRA, and Kevin Dancey, President and CEO of the CPA, during the Financial Management Institute’s Professional Development Week, being held in Ottawa from November 25 to 28. The Framework Agreement recognizes the important relationship between the CRA and CPA Canada in the successful administration of Canada’s tax system, and promotes regular dialogue between the two organizations on tax-related matters of common interest. It will also ensure that input from Canada’s accounting professionals is considered as the CRA moves forward with its change agenda.

A central part of the Framework Agreement includes the creation of seven committees, each co-chaired by a senior representative from both the CRA and CPA Canada, to focus on seven priority areas:

  • Services;
  • Compliance;
  • Tax Administration;
  • Scientific Research and Experimental Development;
  • Commodity Tax;
  • Red Tape Reduction; and
  • Training

The agreement is a key element in the CRA’s efforts to build strong relationships with the Canadian accounting community and tax service providers so that Canada continues to have a well-functioning and world-class tax system that benefits all Canadians.

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CRA Announces Collaboration with CPA Canada

Brent Kern Family Trust: FCA Dismisses Appeal

In Brent Kern Family Trust v. The Queen (2014 FCA 230), the Federal Court of Appeal dismissed the taxpayer’s appeal with reasons delivered from the bench. The taxpayer had argued that the decision of Canada v. Sommerer (2012 FCA 207) should not apply in this case and, in the alternative, that Sommerer was wrongly decided and ought not to be followed.

Brent Kern Family Trust was a case in which the taxpayer undertook a series of transactions whereby a taxpayer (Mr. K) completed an estate freeze for two corporations (the underlying facts are described in detail in the Tax Court decision (2013 TCC 327)).

Following the estate freeze, two family trusts were set up each with Mr. K and his family as beneficiaries as well as each trust having a separate corporate beneficiary. Next, each of the trusts subscribed for common shares in the corporate beneficiary of the other trust.

Once the structure was in place, a dividend was flowed through the structure and, as a final step, one of the trusts paid funds to Mr. K but relied on the application of subsection 75(2) of the Act to deem the dividend income received by the trust to be income in the hands of one of the corporate beneficiaries. Accordingly, if subsection 75(2) of the Act applied, the income would not be subject to tax as a result of section 112 of the Act and Mr. K could keep the gross amount of the funds.

In the decision rendered at trial, the Tax Court held that Sommerer case applied and subsection 75(2) of the Act did not apply on the basis that the trust purchased the property in question for valuable consideration and no “reversionary transfer” occurred.

In Brent Kern Family Trust, the Court of Appeal found that there was no reviewable error in the trial judge’s finding that Sommerer applied, that the Court of Appeal in Sommerer “spent considerable time analyzing the text, content and purpose of subsection 75(2)”, and no reviewable error had been brought to the Court’s attention in the present case.

The Court of Appeal dismissed the taxpayer’s appeal and upheld the Tax Court’s decision.

We note also that at least one taxpayer has brought an application in a provincial court to correct a transaction where the taxpayer never intended for Sommerer to apply. In Re Pallen Trust (2014 BCSC 405), the B.C. Supreme Court rescinded two dividends, the effect of which was to eliminate the tax liability in the trust. Re Pallen Trust is under appeal to the B.C. Court of Appeal.

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Brent Kern Family Trust: FCA Dismisses Appeal

Brogan Family Trust: CRA Not Entitled to Notice of Rectification Application

Is the CRA entitled to notice of a rectification application?

In Brogan Family Trust (2014 ONSC 6354), the Ontario Superior Court of Justice said “no”, and dismissed the Crown’s motion to set aside an earlier rectification order on the basis that the CRA had not been notified of the proceeding.

In Brogan, the taxpayer had restructured his business and settled a trust for family tax planning purposes in 2004. Subsequently, in 2010, the trustees became aware of an error in the trust agreement that prevented the distribution of trust property to intended minor beneficiaries. The trust made an application for rectification of the trust agreement so that the trust property could be distributed as intended. The trust’s tax litigation counsel advised that no notice to the CRA was required.

The rectification application proceeded in November 2010. Shortly before the rectification order was granted, the trust sold a business. In its 2010 tax return, the trust allocated the proceeds to the beneficiaries, who in turn reported the income in their returns.

The CRA commenced an audit of the sale of the business and the trust in June 2012, at which time it became aware of the 2010 rectification order that had corrected the trust agreement. In August 2012, the CRA was provided a copy of the rectification order. And then in May 2013, the CRA brought its motion for an order setting aside the 2010 rectification order.

The Court considered three issues:

  1. Did the CRA bring the motion “forthwith” after learning of the rectification order?
  2. Did the CRA have standing to bring the motion?
  3. Should the CRA have been notified of the rectification application?

The Crown argued that (i) the delay was not inordinate because there had been internal confusion at the CRA in respect of the rectification order, (ii) the CRA was a creditor and thus was affected by the rectification order, and (iii) the CRA’s own view and the custom among tax litigators is that the CRA should be given notice (see, for example, Income Tax Technical News No. 22, at pg. 6).

The taxpayer argued that (i) the CRA’s 10-month delay was unreasonable and not “forthwith”, (ii) the CRA was not affected by the rectification application, and (iii) in any event, there was no requirement the CRA be notified of the rectification application.

The Court agreed with the taxpayer and dismissed the Crown’s motion.

The Court stated that the CRA was not a creditor and thus was not affected by the rectification order. The Court contrasted the current case with Snow White Productions Inc. v. PMP Entertainment Inc. (2004 BCSC 604), in which the rectification proceeding had been launched in response to an adverse ruling by the CRA and it was thus appropriate for the CRA to receive notice and participate (see also Aim Funds Management Inc. v. Aim Trimark Corporate Class Inc. (2009 CanLII 29491 (ON SC)).

On the issue of delay, the Court stated that the CRA had not brought the motion forthwith. The 10-month delay was the fault of the CRA, and even after the rectification order was referred to counsel, it still took two months for the motion to be launched.

And finally, on the issue of whether notice should be provided to the CRA, the Court stated that it had been directed to no authority on the point that the CRA should be given notice, nor on the point that notice is required if the CRA is not a creditor. The Court was not persuaded that providing notice to the CRA was the practice of tax litigators, and nor was it the law.

Rather, in the Court’s view, the delivery of a Notice of Assessment creates rights for the CRA to participate in a rectification proceeding as a creditor (see, for example, Canada (A.G.) v. Juliar ((2000) 50 O.R. (3d) 728 (C.A.) (a case on which Dentons was counsel for the successful taxpayer)).

The Court concluded as follows:

[22] … the CCRA is only required to be given notice of a proposed rectification proceeding when the CCRA’s legal interests might be directly affected by the outcome of the rectification proceeding, such as where the CCRA is a creditor and the rectification would affect its rights. Otherwise, the CCRA might be made a party when so advised by counsel that notice should be given to the CCRA.

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Brogan Family Trust: CRA Not Entitled to Notice of Rectification Application

Highlights from the Toronto Centre CRA & Tax Professionals Groups Breakfast Seminar (November 6, 2014)

On November 6, 2014 at the Toronto Centre Canada Revenue Agency & Tax Professionals Breakfast Seminar, representatives from the CRA provided an update on the Income Tax Rulings Directorate (“Rulings”) and discussed current topics of interest.

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.

Mr. Sarazin noted that 10 years ago Rulings received approximately 500 ruling requests whereas today Rulings receives approximately 120 requests each year. As a result, there is an increased effort to engage with not only taxpayers but also the Department of Finance, Department of Justice, internal CRA employees, various accounting and legal professional organizations.

The slides from Mr. Sarazin’s presentation are available here.

Folios - In March 2013, 11 folios were published, which took approximately two years to draft and finalize. Ruling has partnered with the Canadian Tax Foundation and CPA Canada to increase the number and timeliness of Folios. Currently, there are 38 additional folios at the draft stage.

National Capacity Building Forums – Rulings is providing taped video sessions or webinars for all CRA employees in order to educate and raise awareness of certain tax issues and subjects. Attendees also include individuals from the Department of Justice and Revenue Quebec.

Pre-Rulings Consultations – This initiative was announced on November 26, 2013 at the Roundtable session at the 65th Annual Tax Conference of the Canadian Tax Foundation held in Toronto, Ontario. The initiative allows taxpayers to meet with Rulings to discuss potential transactions before a formal ruling application is filed. Although only 6-7 requests were received in the first nine months of the program, in the past three months 21 requests were received. Of these 21 requests, 17 have been concluded. In nine of the 17 requests, the CRA responded that a favourable ruling would not be issued.

Technical Capacity/Satellite Offices – Rulings is continuing efforts to hire new staff and reallocate existing staff. Rulings is also establishing satellite offices to attract new employees. For example, Rulings has recently established a presence in the Toronto Centre TSO and the North York TSO. In future years, Rulings expects that it will grow its presence in Toronto, Montreal, Calgary and Vancouver.

Stakeholder Engagement -In conjunction with CPA Canada, Rulings has established a framework for consideration of current issues. Seven committees have been struck under the framework:

  • Service Committee (i.e., how to improve services provided to taxpayers);
  • Compliance Committee (i.e., how to address early conflicts between auditors and taxpayers before the appeals stage);
  • Tax Administration Committee (i.e., dealing with flaws in the legislation);
  • SR&ED Committee (i.e., all issues relating to the scientific research and experimental development tax incentives);
  • HST/GST/Excise Committee (i.e., all issues relating to these areas of the law)
  • Training Committee (i.e., hiring new talent and training auditors)
  • Red Tape Committee (i.e., focusing on increasing efficiencies at a national level)

Current Topics of Interest

Vitaliy Anissimov, Industry Sector Specialist, Income Tax Rulings Directorate, discussed several topics that had been addressed in the CRA Roundtable at the recent APFF conference in Montreal (we expect that the full questions/answers will be published by the CRA in the future).

The slides from Mr. Anissimov’s presentation are available here. A general summary of some of the issues discussed is as follows:

  • In response to the interest deductibility discussion in Swirsky v. The Queen (2013 TCC 73), the CRA noted that as long as there is a reasonable expectation that a corporation will pay dividends then interest can be deducted on loans to acquire common shares of that same corporation (see paragraph 31, of IT-533). Each case will, however, be decided on its own facts.
  • The CRA’s position on the use of average exchange rates has not changed for the purposes of gains or losses on account of income (see CRA Document No. 2014-0529961M4 ” Capital gains on property in foreign currency” (June 10, 2014)).
  • The CRA noted that interest paid by a trust on a note issued by it to a beneficiary in settlement of a capital interest of the beneficiary in the trust is not deductible by the trust for the purposes of calculating its income under 20(1)(c)(ii) of the Act because there is no income-earning purpose;
  • In response to D&D Livestock v. The Queen (2013 TCC 318), which allowed a taxpayer to take into account twice the amount of safe income in the context of subsection 55(2) of the Act, the CRA noted that it would consider using GAAR in this type of case where there is a duplication of tax attributes by the taxpayer.
  • Subsection 98(3) would not apply where a partnership ceases to exist as a result of an acquisition by a single partner of all partnership interest. The requirements of subsection 98(3) would not be met in this type of case.
  • The CRA will consider the reasonableness of maintaining surplus accounts in a particular currency on a case by case basis (see also Regulation 5907(6) and section 261 of the Income Tax Act).

 

Highlights from the Toronto Centre CRA & Tax Professionals Groups Breakfast Seminar (November 6, 2014)