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Emerging Markets: Non-EU Investment Funds Eligible for Withholding Tax Refund

In Emerging Markets Series of DFA Investment Trust Company (C -190/12), the European Court of Justice (ECJ) confirmed that investment funds based outside the European Union (EU) should benefit from the EU free movement of capital rule regarding investments in Europe. Thus, if an EU domestic investment fund can benefit from local income tax exemptions, then non-EU investment funds (e.g., U.S. or Canadian) investing in the EU should also be entitled to apply for such exemptions.

In Emerging Markets, a U.S. investment fund applied for a refund of withholding tax paid on dividends derived from Polish companies. The ECJ stated that U.S. investment funds are entitled to put themselves in a position similar to that of local funds. This means that under certain conditions non-EU investors may benefit from local tax preferences/exemptions.

In light of the relevant Polish regulations (which provide for income tax exemptions for domestic investment funds and funds based in the EU/EEA) and the tax information exchange agreement between Poland and U.S., the dividends paid to a U.S. investment fund should also be exempt from withholding tax in Poland.

The ECJ’s judgment in Emerging Markets provides a basis for non-EU investors to benefit from certain EU rules and to rely on tax preferences granted to EU/EEA entities. Therefore, if these investors have paid withholding tax on dividends derived from EU/EEA companies, they should consider whether certain tax preferences are available for investment funds in the country of residence of the companies paying the dividends (subject to any applicable time limits).

Canadian companies should also consider whether a refund of withholding tax would impact the foreign tax credit available in respect of any withholding tax previously paid and not refunded.

Additional information is available here.

Cezary Przygodzki and Rafal Mikulski practice in Dentons’ Warsaw office. 

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Emerging Markets: Non-EU Investment Funds Eligible for Withholding Tax Refund

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?

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

Mark Your Calendars: Tax Litigation Forum – December 11, 2013

As the Canada Revenue Agency becomes increasingly aggressive in pursuit of perceived domestic and offshore tax avoidance, it is more important than ever to be familiar with recent developments in legislation, policy and procedure. David W. Chodikoff (Miller Thompson LLP) and David E. Spiro (Dentons Canada LLP) are, therefore, delighted to chair this tax litigation conference – the first organized by Insight Information.

Leading litigators and clients have been gathered to participate in lively panel discussions covering a wide range of challenging issues – from how to deal with CRA requirements and misconduct to making successful voluntary disclosure applications and fairness requests. You’ll learn about the latest developments in transfer pricing and the GAAR and will find out how project management can help you win your case. Finally, for those cases that can be resolved before trial, his conference will explore when and how to take advantage of the opportunities for settlement. In short, you will leave with the tools to resolve tax controversies more confidently than ever!

Event Details
December 11, 2013
07:45 AM – 05:00 PM EDT
St. Andrew’s Club and Conference Centre
150 King Street West
Toronto, Ontario M5H 4B6

For more information, including a list of Distinguished Faculty members and Event Schedule, click here.

To register, click here.

Mark Your Calendars: Tax Litigation Forum – December 11, 2013

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

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

Out with the Old, In with the New: Clearwater Seafoods Holdings Trust v. The Queen

In the recent decision in Clearwater Seafoods Holdings Trust (2013 FCA 180), the Federal Court of Appeal considered the scope and purpose of Rule 29(1) of the Tax Court of Canada Rules (General Procedure) (the “Rules”).  When a trust ceases to exist during the course of a tax appeal, with tax liability shifting to a new person, may the new person continue the appeal?  The Court answered that question in the affirmative and unanimously held that this scenario falls within the language and intended purpose of Rule 29(1).

In 2011, Clearwater Seafoods Holdings Trust (the “Trust”) appealed an income tax assessment to the Tax Court of Canada.  In 2012, the Trust transferred all of its assets to Clearwater Seafoods Income Fund, which subsequently transferred the assets to Clearwater Seafoods Incorporated (the “Corporation”).  This transfer occurred in the context of the Trust “converting” to avoid application of the SIFT rules under the Income Tax Act.

At the Tax Court (2012 TCC 186), both parties accepted that the Trust had been terminated as a result of the disposition of all its property; however, this did not automatically bring the income tax appeal to an end.  The issue in Clearwater was whether the tax appeal could be continued with the Corporation as appellant in place of the Trust.  To obtain an order permitting the Corporation to assume the position of appellant going forward, a motion was brought by the Trust pursuant to section 29 of the Rules, which states,

29 (1) Where at any stage of a proceeding the interest or liability of a person who is a party to a proceeding in the Court is transferred or transmitted to another person by assignment, bankruptcy, death or other means, no other proceedings shall be instituted until the Registrar is notified of the transfer or transmission and the particulars of it. [emphasis added]

Once notice has been given to the Registrar, Rule 29 provides that the Chief Justice or a judge designated by him may direct the continuation of the proceeding.  At the Tax Court, the taxpayer brought a motion arguing that the Corporation is the appropriate party to continue the tax appeal as it now owned the property and would be liable if the appeal is unsuccessful.  The Crown argued that the tax appeal should be dismissed for want of an appellant.  The Tax Court held that the matter were not within the scope of Rule 29(1) and the motion was dismissed.  The order was appealed to the Federal Court of Appeal.

The Court of Appeal held that the lower court had construed Rule 29(1) too narrowly.  In arriving at this conclusion, the Court of Appeal addressed the rule’s underlying rationale.  The Court found that the purpose of Rule 29(1) is to deal with instances in which the circumstances of a litigant have changed and special accommodations are required in order to continue the proceeding.  Such changes may include bankruptcy, incapacity due to illness or injury, death of a litigant or the dissolution of a litigant that is a corporation.  The Court also considered such changes to include circumstances where a litigant that is a trust is terminated as a result of the disposition of all of its property.

The Federal Court of Appeal found that the transfer of the property to the Corporation, in effect, placed tax liability on the Corporation and the trustees in the event of an unsuccessful tax appeal.  The termination of the existence of the Trust was found to be within the meaning of “other means” in Rule 29(1).  Consequently, it was held that there was a transmission of liability from the Trust to “another person” by “other means”. The Court held that this scenario falls within the language and purpose of Rule 29(1).  As a result, the appeal was allowed and the matter was sent back to the Tax Court to be reconsidered with a view to directing the continuation of the proceedings.

The decision in Clearwater highlights the Court’s willingness to interpret Rule 29(1) in a broad manner.  It also raises the question of what constitutes “other means” for the purposes of Rule 29.  As a result, it is important for any taxpayer, or party which may acquire tax liability, to consider the implications of Clearwater prior to an income tax appeal.

Out with the Old, In with the New: Clearwater Seafoods Holdings Trust v. The Queen

Waiving rights of objection and appeal: SCC declines to hear the taxpayer’s appeal in Taylor v. The Queen

On August 15, 2013, the Supreme Court of Canada dismissed the application for leave to appeal in Terry E.Taylor v. Her Majesty the Queen (2012 FCA 148).

In Taylor, the issue was whether a signed settlement agreement under which the taxpayer waived his right to appeal was binding. In that case, the taxpayer was assessed for income tax and GST, as well as gross negligence penalties and interest. He signed a settlement agreement under which the Minister of National Revenue would vacate the gross negligence penalties and, in exchange, he would waive his right to object or appeal in accordance with subsections 165(1.2) and 169(2.2) of the Income Tax Act and subsections 301(1.6) and 206.1(2) of the Excise Tax Act. The taxpayer, who did not have counsel advising him at the time, later claimed that he was under duress when he signed the agreement. Having already disposed of the penalties, he went to Tax Court to challenge the amount of tax assessed.

Justice Judith Woods held that the taxpayer’s testimony that he was “scared” and pressured into signing the agreement lacked credibility given his qualifications as a Certified Management Accountant and his extensive business and financial experience. He had ample time to consult with counsel prior to meeting with the CRA. The Tax Court held that the settlement agreement was “freely made” and signed without “undue pressure.”  The Tax Court dismissed the taxpayer’s appeal (2010 TCC 246) and the Federal Court of Appeal affirmed at 2012 FCA 148. As noted above, the Supreme Court of Canada has declined to hear Mr. Taylor’s appeal.

Taylor adds to an existing body of case law on the question of whether, and under what circumstances, settlement agreements between taxpayers and the CRA can be set aside. The Tax Court has held that in certain limited circumstances a settlement agreement may not be binding. For example, in 1390758 Ontario Corporation v. The Queen (2010 TCC 572) and Huppe v. the Queen (2010 TCC 644), agreements were held to be binding so long as they were made on a “principled” basis (see, for example, Daniel Sandler and Colin Campbell, “Catch-22: A Principled Basis for the Settlement of Tax Appeals“, Canadian Tax Journal (2009), Vol. 57, No. 4, 762-86).

Given that a significant portion of tax disputes are settled and never reach the courtroom, professional advisors should ensure that taxpayers understand the implications of signing settlement agreements under which they relinquish rights of objection or appeal.

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Waiving rights of objection and appeal: SCC declines to hear the taxpayer’s appeal in Taylor v. The Queen

The importance of a notice of objection: Salisbury v. The Queen

In Salisbury House of Canada Ltd. et al. v. The Queen (2013 TCC 236), the Tax Court of Canada reiterated the importance of the statutory preconditions that must be met before a taxpayer may appeal to the Court. These statutory requirements should be kept in mind by taxpayers who wish to ensure their disputes are heard on the substantive merits rather than dismissed for procedural reasons before they have an opportunity to argue their case.

In Salisbury, the corporate taxpayer operated several restaurants in the Winnipeg area. The company was assessed additional GST for the period February to June, 2006 but did not object to those assessments. Around the same time, a new board of directors was elected. Due to financial difficulties, the company made a proposal under the Bankruptcy and Insolvency Act and attempted to negotiate an agreement with the CRA pertaining to the GST arrears. The parties eventually agreed that a portion of the GST liability would be paid. Importantly, at this point, no directors’ liability assessments had been issued under s. 323 of the Excise Tax Act. Payment was remitted, but the directors sought to have their potential liability for tax determined “by a court of competent jurisdiction”.

The company and the individual directors each filed a Notice of Appeal in the Tax Court. In response, the Crown brought a motion to dismiss the appeals pursuant to paragraph 53(b) of the Tax Court of Canada Rules (General Procedure) on the grounds that (inter alia) the appeals were scandalous, frivolous or vexatious.

Under section 306 of the Excise Tax Act, a taxpayer must file a notice of objection before a Notice of Appeal may be filed in the Tax Court. In Salisbury, the GST assessments against the corporate taxpayer had not been challenged by way of objection and there had been no assessments issued against the directors.  The Minister argued that the appellants had no statutory right of appeal because the requirements of section 306 had not been met.

The Tax Court granted the Minister’s motion and dismissed the appeals. Since no notices of objection had been filed by the company, this precluded an appeal from the original GST assessments. In respect of the appeals by the individual directors, the Court held that they too could not succeed – no assessments had been issued, and no notices of objection filed.

The Salisbury decision is consistent with a long line of jurisprudence reflecting the requirement that taxpayers must satisfy the statutory preconditions before appealing to the Tax Court. In Roitman v. The Queen (2006 FCA 266), the Federal Court of Appeal stated that a court “does not acquire jurisdiction in matters of income tax assessments simply because a taxpayer has failed in due course to avail himself of the tools given to him by the Income Tax Act.” More recently, in Goguen v. The Queen (2007 DTC 5171), the Tax Court reiterated that, as “a matter of law, the failure of the [taxpayer] to serve a notice of objection on the Minister deprive[s] the Tax Court of Canada of the jurisdiction to entertain an appeal in relation to the assessment” (see also Whitford v. The Queen (2008 TCC 359), Bormann v. The Queen (2006 FCA 83), and Fidelity Global Opportunities Fund v. The Queen (2010 TCC 108)).

Salisbury reminds corporate and individual taxpayers of the need to obtain proper advice from tax professionals with respect to their rights and obligations under the Excise Tax Act and the Income Tax Act. This is all the more important in cases where the corporation is experiencing financial difficulty and/or contemplating protection under the Bankruptcy and Insolvency Act (i.e., as the CRA may be a primary creditor). In Salisbury, the directors may not have been personally liable for corporate taxpayer’s GST liability. However, because of the manner and timing of the payment of GST arrears, their “appeal” to the Tax Court was defeated on procedural rather than substantive grounds and they were, unfortunately, precluded from presenting their case.

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The importance of a notice of objection: Salisbury v. The Queen

Tax Court of Canada issues a comprehensive ruling on privilege issues and the appropriate exercise of remedies to address deficient lists of documents

In a recent Tax Court of Canada ruling on a motion heard in Imperial Tobacco Canada Limited v. The Queen, 2013 TCC 144 the Court considered a motion for an Order directing the Appellant to attend and be cross-examined on its List of Documents pursuant to subsection 82(6) and paragraph 88(a) of the Tax Court of Canada Rules (General Procedure) (the “Rules”). Justice D’Arcy heard and dismissed the motion, choosing instead to exercise other remedies available to the Court under section 88 of the Rules. A portion of the Respondent’s motion dealt with privileged documents. In ruling on these documents, the Court addressed several issues in the area of solicitor-client privilege and made a notable finding that email communications between the taxpayer and its lawyer lost privileged status as a result of the taxpayer’s accountant being included on the communications.

Background

The Appellant in Imperial Tobacco is a subsidiary of British American Tobacco p.l.c. The Appellant acquired preferred shares of affiliated subsidiaries (the “Affiliated Companies”) and the Minister disallowed the Appellant’s deductions of dividends received from those Affiliated Companies which was appealed to the Tax Court of Canada.

The Respondent had concerns with the Appellant’s List of Documents, specifically with respect to identifying necessary metadata (electronic data relating to specific documents referred to in Schedule “A” including author, when the document was created and history of changes to the document), deleted documents referred to in Schedule “C”, and privileged documents listed in Schedule “B”. As a result of these concerns, the Respondent moved for an Order allowing cross-examination on the Appellant’s List of Documents in order to gather further information relevant to its concerns. The Respondent relied upon the following provisions under the Rules:

82(6)   The Court may direct a party to attend and be cross-examined on an affidavit delivered under this section.

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88.       Where the Court is satisfied by any evidence that a relevant document in a party’s possession, control or power may have been omitted from the party’s affidavit of documents, or that a claim of privilege may have been improperly made, the Court may,

(a) Order cross-examination on the affidavit of documents,

(b) Order service of a further and better affidavit of documents,

(c) Order the disclosure or production for inspection of the document or a party of the document, if it is not privileged, and

(d) Inspect the document for the purpose of determining its relevance or the validity of a claim of privilege.

Other Remedies under Section 88 should be considered before Cross-examination

Although the Court acknowledged that cross-examination should be considered if it has concerns that a List of Documents does not satisfy the requirements under the Rules, it agreed with the Appellant that subsection 82(6) takes away the automatic right to cross-examine. Instead, the Court found that all of the remedies under section 88 must first be considered before issuing an Order for cross-examination on a List of Documents. In this case, the Court found that perceived deficiencies in the Appellant’s List of Documents could be better addressed by ordering the service of a further and better List of Documents. The Court went on to also make specific orders which required the parties to exchange information to pinpoint what documents the metadata would be required for, and to work towards an agreement on search terms to resolve the deleted documents concern.

The Court’s Analysis and Rulings in respect of Privilege Issues

Since the parties agreed to provide the Court with a book of privileged documents, Justice D’Arcy was able to address the privilege concerns without the need for cross-examination through the remedy available to the Court under paragraph 88(d) which permits the Court to inspect a document for the purpose of determining a claim of privilege.

Several privilege issues were raised by the Respondent which afforded the Court an opportunity to canvass the applicable law in making its ruling. The issues and the Court’s determination of each are listed below:

1. Internal communications between the Appellant’s employees – The Court discussed the circumstances in which internal communications between employees of a company may be privileged, namely, if the communications reflect confidential legal advice provided by the company’s lawyer or if the lawyer marks or makes a note on a disseminated document. The Court then went on to analyze what specific internal communications were privileged.

2. Solicitor-client communications disclosed to employees of the Affiliated Companies – The Court discussed common interest privilege under this issue and explained that privilege may be maintained where one party to a commercial transaction provides privileged documents to another party of the transaction to further their common interest of having the transaction concluded. In this case, the Court concluded that several documents exchanged between the Affiliated Companies were privileged on this basis.

3. Solicitor-client privileged documents disclosed to an accountant – This issue centered on disclosure of legal communications by the Appellant, its counsel and the Affiliated Companies to PriceWaterhouseCoopers Australia (“PWC Australia”). Relying on the principles espoused by the Exchequer Court in Susan Hosiery Limited v. M.N.R., the Appellant argued that solicitor-client privilege extended to the communications with PWC Australia on the basis that PWC Australia’s input was necessary to the provision of legal advice by counsel. The Court accepted this principle of law but found a lack of evidence establishing that PWC Australia’s role extended to any function which could be said to be integral to the solicitor-client relationship. Therefore, the disclosure of the documents to PWC Australia constituted disclosure to a third party which amounted to waiver of privilege. The Court placed some emphasis on the fact that there was no evidence of any accounting information that could only be provided by PWC Australia.

4. Implied waiver – The Respondent argued that there was implied waiver of solicitor-client privilege since the Appellant, in denying that tax avoidance was the principle purpose for its investments, placed its state of mind in issue and any legal advice obtained to help form that state of mind was waived. The Court disagreed, and found that state of mind waiver only applies where a party relies on legal advice as part of its claim or defence which had not been put into issue by the Appellant in this appeal. In that regard, the Court noted that nowhere in the Appellant’s pleadings was there any reference to legal advice previously obtained.

5. Legal advice vs. business advice – Communications between a lawyer and client will only be privileged if it is in the course of providing legal advice, not advice relating to purely business matters. The Court found that the issue does not arise in the appeal.

Concluding Remarks

Justice D’Arcy’s decision reflects what the Court likely regarded as a pragmatic approach to the exercise of remedies available to it. It is open to the Court to order cross-examination, but other less costly steps are available to it, and should be first considered. This aspect of the decision should be considered by counsel before deciding to pursue cross-examination. Counsel should first aim to reach agreement on other steps to address concerns relating to production issues.

The privilege discussion contained in this decision highlights the range of such issues that arise in tax appeals. The decision highlights that internal client communications and external communications with accountants and other experts needs to be carefully managed. Counsel should discuss privilege issues with clients at the front end of litigation so they are alert to the pitfalls of waiver.

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Tax Court of Canada issues a comprehensive ruling on privilege issues and the appropriate exercise of remedies to address deficient lists of documents