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GAAR Did Not Apply In Respect of Capital Gains Allocated to Minor Beneficiaries of a Family Trust

On March 21, 2012 the Tax Court of Canada issued judgment in the decision of McClarty Family Trust et al v. The Queen. The Minister of National Revenue (the “Minister”) had applied the general anti-avoidance rule (the “GAAR”) in section 245 of the Income Tax Act (the “Act”) to re-characterize capital gains reported by the McClarty Family Trust (“MFT”) as taxable dividends. However, the Court agreed with the appellants’ submissions that the transactions in issue were undertaken primarily for the purpose of placing Darrell McClarty, the father of the minor beneficiaries of the MFT, beyond the reach of creditors and allowed the appeal.

The Minster’s argument was that pursuant to a series of transactions, Darrell McClarty was able to split business income with his minor children in a manner that avoided the tax on split income in section 120.4 of the Act (as it existed in 2003 and 2004).

Darrell McClarty was the owner of all of the issued and outstanding Class A voting shares of McClarty Professional Services Inc. (MPSI). The MFT owned all of the issued and outstanding Class B, non-voting common shares. MPSI, in turn, owned 31% of Projectline Solutions Inc., which earned business income from the provisions of geotechnical engineering services.

In 2003 and 2004, the MFT received stock dividends consisting of Class E common shares of MPSI. The Class E shares had low paid-up capital and a high redemption value. After the Class E shares were received by the MFT, the MFT sold them to Darrell McClarty for fair market value, realizing capital gains. The capital gains were then distributed to the minor beneficiaries of the MFT, and thereby not subject to tax under section 120.4 of the Act.

Through a series of loans between Darrell McClarty, MPSI and the MFT, Mr. McClarty ended up owing $104,400.37 in outstanding promissory notes to the MFT and the MFT had outstanding promissory notes in the amount of $96,000 owned to its minor beneficiaries. The Minister argued that the creditor protection objectives were essentially ineffective and that the circular flow of loans disguised the true intention of the plan, which was to distribute funds to minor beneficiaries in a manner that would not subject them to the tax on split income in section 120.4.

However, the Court accepted Mr. McClarty’s evidence that he was motivated to protect assets from his former employer, who was a potential judgment creditor in relation to allegations of improper use of software belonging to the former employer. The Court also agreed that because of the liabilities of Mr. McClarty and the MFT noted above, the creditor protection objectives were achieved.

It was also argued that the protection from creditors would have been achieved simply by paying dividends to the beneficiaries of the MFT and therefore the declarations of stock dividends amounted to avoidance transactions. However, the Court accepted the Appellants’ argument that the transfer of wealth from MPSI was undertaken to provide protection from creditors without attracting significant tax costs. The transactions were not avoidance transactions because it was acceptable to undertake creditor proofing transactions in a manner that attracted the least possible tax. Furthermore, the transaction would never have occurred in the absence of the need to protect MPSI’s assets.

The Court therefore concluded that because there were no avoidance transactions under subsection 245(3) of the Act, there was no need to continue the analysis to determine if there was abusive tax avoidance. However it did note that to the extent that there was a gap in the legislation, which allowed for the distribution of capital gains to minor beneficiaries of a trust in a manner that was not taxable under section 120.4 of the Act, it was inappropriate for the Minister to use the GAAR to fill in the gaps.

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GAAR Did Not Apply In Respect of Capital Gains Allocated to Minor Beneficiaries of a Family Trust

Morguard Corporation v. The Queen – When will a “break fee” be considered income?

In Morguard Corporation v. The Queen, 2012 TCC 55, Justice Boyle of the Tax Court of Canada considered whether a “break fee” received by a predecessor of the Appellant (for the purposes of this discussion, the “Appellant”) in respect of its unsuccessful attempted acquisition of a public corporation, was received on account of income or capital (there was also a procedural issue that will not be discussed in this post).  Based on the approach set out in Ikea Ltd. v. Canada, [1988] 1 SCR 196, 98 DTC 6092, affirming 96 DTC 6526 (FCA) and 94 DTC 1112 (TCC), Justice Boyle concluded that, on the facts, a break fee such as the one received by the Appellant was taxable on account of income because the negotiation and inclusion of break fees in the Appellant’s acquisition agreements was an integral part of its commercial business operations and activities. 

The relevant facts in this case are quite simple. In early 1997, the Appellant commenced implementation of its business strategy of assembling direct or indirect ownership of, or controlling positions in, real estate companies.  As a result of this business strategy, the Appellant acquired large/controlling interests in a number of real estate companies. 

In 1998, the Appellant acquired 19.2% of Acanthus Real Estate Corporation (“Acanthus”).  In June 2000, the Appellant made a hostile take-over bid for all of the remaining shares in Acanthus at a purchase price of $8.00, thereby increasing its position to 19.9%.  Following negotiations between Acanthus and the Appellant, the parties entered into a pre-acquisition agreement in order to give support and deal protection to the Appellant and the bid.  Pursuant to this pre-acquisition agreement, it was agreed that the Appellant would acquire all the outstanding shares of Acanthus at a purchase price of $8.25 per share and that Acanthus would, inter alia, pay a break fee of $4.7 million to the Appellant if a better bid was received and accepted by Acanthus.

On June 29, 2000, Acanthus received an unsolicited bid from a third-party (the “Third-Party”) for all of the outstanding shares of Acanthus at a purchase price of $8.75.  Attempting to thwart the Third-Party bid, the Appellant increased its bid to $9.00 per share on July 2, 2000.  At that time, the Appellant and Acanthus entered into an amending agreement (the “Amending Agreement”) to the original pre-acquisition agreement, pursuant to which a superior offer from a third-party would need to be for at least $9.30 per share and the break fee was increased to $7.7 million. 

Ultimately, Acanthus accepted an offer from the Third-Party for $9.40 and the Appellant chose not to match the offer.  Consequently, the Amending Agreement was terminated and Acanthus paid the Appellant the $7.7 million break fee.  In addition to the $7.7 million break fee (the “Break Fee”), the Appellant realised a gain of $4.8 million on the sale of its shares of Acanthus.

The Appellant argued that the Break Fee was a capital receipt and therefore should not be taxable because it was not received in respect of a disposition of property (i.e. no property was actually disposed of).  Critical to the Appellant’s argument was, the fact that (a) the Break Fee was received in relation to the acquisition of shares of Acanthus, which was a capital investment, and (b) the receipt of the Break Fee was the only time the Appellant had ever received a break fee in attempting to implement its real estate company acquisition strategy. 

After dismissing the Appellant’s “windfall” argument, Justice Boyle noted that Ikea is the leading modern case on the characterization of extraordinary or unusual receipts in the business context.  In that case, the taxpayer sought to assemble long-term leaseholds from which to operate its business.  In doing so, the taxpayer received a “tenant inducement payment” which it treated on capital account because the payment was received in respect of a long-term lease, which is capital in nature.  All levels of court found that the receipt was on income account because the leaseholds were necessary to the business of the taxpayer and they were a necessary incident to the conduct of the taxpayer’s business.  Consequently, the capital purpose (assembling long-term leaseholds) was not the relevant link to be considered. 

Citing the reasons for Judgment in the Tax Court of Canada in Ikea, Justice Boyle noted, at paragraph 43, that Justice Bowman was correct in finding “that the payment was clearly received and inextricably linked to [the taxpayer’s] ordinary business operations, and further that no question of linkage to a capital purpose could even be seriously entertained.”  In this case, Justice Boyle found that break fees were expected incidents of the Appellant’s business strategy of entering into acquisition agreements with real estate corporations, regardless of how unusual the receipt of such a payment may be and, therefore, the Break Fee was an amount received in the course of the Appellant’s business and commercial activities.  Consequently, the receipt of the Break Fee by the Appellant was on account of income.

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Morguard Corporation v. The Queen – When will a “break fee” be considered income?

“Beneficial Owner” – CRA’s Assessment of Velcro Doesn’t Stick

The Tax Court has once again considered the meaning of the phrase “beneficial owner” for purposes of the tax treaty between Canada and the Netherlands (the “Treaty”).  It has also once again ruled in favour of the taxpayer in determining that a Dutch holding company was the “beneficial owner” of amounts received from a related Canadian company.

On February 24, 2012, the Tax Court of Canada released its eagerly-anticipated decision in Velcro Canada Inc. v. Her Majesty the Queen, which addresses the applicable Canadian withholding tax rate in respect of cross-border royalty payments within a multinational corporate group.  The decision comes almost four years after the Tax Court of Canada released its landmark decision in Prévost Car Inc. v. The Queen, which dealt with the identical treaty interpretational issue in the context of cross-border dividend payments.  The decision of the Tax Court was affirmed by the Federal Court of Appeal.

Both the Prévost Car Inc. and Velcro decisions are relevant to any multinational enterprise using a foreign holding company as an investment/financing vehicle and provide considerable comfort concerning the tax effectiveness of such structures.

The issue in Velcro was whether a Dutch holding company was the “beneficial owner” of royalties paid by a related Canadian company, and therefore entitled to a reduced rate of Canadian withholding tax under the Treaty in respect of the royalties.  Pursuant to the “beneficial owner test” described in Prévost Car Inc., this required that the Tax Court consider the following issues:

  • Did the Dutch holding company enjoy possession, use, risk and control of the amounts it received from the Canadian corporation?
  • Did the Dutch holding company act as a “conduit”, an agent or a nominee in respect of the amounts it received from the Canadian corporation?

The CRA’s position was that Dutchco was not the beneficial owner of the royalties generally because Dutchco was contractually required to remit a specific percentage of all amounts received from the Canadian corporation to its parent company located in the Netherlands-Antilles (which does not have a comprehensive tax treaty with Canada).  If the Canadian company had paid royalties directly to the Netherlands-Antilles company the royalty payments would have been subject to a 25% Canadian withholding tax.  In the CRA’s view, Dutchco was merely a collection agent for the Netherlands-Antilles company.

The Court rejected the CRA’s arguments and concluded that Dutcho was indeed the beneficial owner of the royalties.  The basis for the Court’s conclusion was that, even though Dutchco may have been contractually required to pay money onward to the Netherlands-Antilles company, it retained some discretion as to the use of the royalties while in its possession. Dutchco therefore possessed sufficient indicia of beneficial ownership while it held the royalties and could not be considered a conduit based on the “beneficial ownership test” outlined in Prévost Car Inc., which requires a lack of all discretion.

It is unclear at this time whether the CRA will appeal the Tax Court’s decision in Velcro to the Federal Court of Appeal. The tax community will continue to watch the progress of this case (if any) with great interest.

Please open the attached PDF for further information about the Velcro case.

Please visit the FMC website for prior coverage of Prévost Car Inc.

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“Beneficial Owner” – CRA’s Assessment of Velcro Doesn’t Stick

Tax Court Denies Deduction in Tower Financing Structure

Taxpayers that have implemented cross-border tower financing structures and that have claimed a Canadian tax deduction for any U.S. taxes paid should revisit their structures carefully in light of the Tax Court of Canada’s recent decision in FLSMIDTH Ltd. v. The Queen (2012 TCC 3), which is the Court’s first decision concerning tower structures.

For a more detailed review of this case, please click here.

The primary tax benefit of the typical tower structure is an interest deduction in both Canada and U.S. in respect of the same borrowing.  However, in certain tower structures, a spread is earned by a U.S. entity based on the amount of interest that is received by that entity from lower-tier entities in the structure and the amount of interest that is paid by the entity on external bank financing.  This spread is typically subject to U.S. federal income tax.

In FLSMIDTH Ltd. v. The Queen, the viability of the double interest deductions was not at issue; rather, the issue was whether an additional deduction under subsection 20(12) of the Income Tax Act (Canada) (the “Act”) was available under the Act with respect to the U.S. income tax that was paid on the spread.

Generally, the taxpayer would be entitled to the deduction under subsection 20(12) of the Act for the U.S. tax paid if two conditions were met:

1. the tax must have been paid in respect of a source of income under the Act; and

2. the U.S. tax must not reasonably be regarded as having been paid in respect of income from the share of a capital stock of a foreign affiliate of the taxpayer.

The Tax Court agreed that the U.S. tax was paid in respect of a source of income for purposes of the Act, even though that specific source of income (i.e., income that was characterized as interest for U.S. tax purposes) was not itself subject to tax under the Act; however, the Tax Court denied the deduction on the basis that the tax was in respect of income from the share of a foreign affiliate of the taxpayer.  Central to the Court’s decision was the broad interpretation that is to be given to the term “in respect of” for purposes of the Act.

Taxpayers that have implemented tower structures and that have claimed a subsection 20(12) deduction on any U.S. tax paid should reconsider their structures and contact a tax advisor to discuss the potential implications of this case in their particular circumstances.

At this time it is unclear whether the taxpayer will appeal this decision to the Federal Court of Appeal.

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Tax Court Denies Deduction in Tower Financing Structure

Successful Challenge to Portions of the Crown’s Reply on the Deductibility of Amounts Paid by CIBC to Settle Enron Litigation

On December 19, 2011, the Tax Court partially granted an application by Canadian Imperial Bank of Commerce (“CIBC”) (2011 TCC 568). The motion concerned whether the Crown’s Reply should be struck out, either wholly or in part (there were actually four separate Replies, but all are substantially similar). Associate Chief Justice Rossiter did not strike out the entire Crown pleading, but ordered 98 paragraphs struck out and 92 paragraphs amended from the main Reply (with the same amendments to be made to the other three Replies). The main Reply was 94 pages long with 70 pages of assumptions.

The Tax Court appeals involve the deductibility of amounts paid by CIBC to settle litigation arising from the failure of Enron in 2001. CIBC was named (along with a number of other parties) as a defendant in a pair of law suits filed after Enron went bankrupt. CIBC settled the claims against it in consideration for a payment of $2.65 billion in 2005 and deducted those amounts, along with related interest and legal expenses in computing income for its 2005 and 2006 taxation years.

The Minister of National Revenue denied the deduction of the settlement amounts. CIBC appealed to the Tax Court of Canada. The Crown filed a Reply, and CIBC filed a motion to have the Reply struck out in its entirety. The contentious point is whether the “egregious or repulsive” principle can be used to determine whether expenses are deductible. The concept was referred to at paragraph 69 of the reasons for judgment in 65302 British Columbia Ltd. v. Canada where a majority of the Supreme Court of Canada (per Iacobucci J.) made the following observation:

It is conceivable that a breach could be so egregious or repulsive that the fine subsequently imposed could not be justified as being incurred for the purpose of producing income. However, such a situation would likely be rare and requires no further consideration in the context of this case, especially given that Parliament itself may choose to delineate such fines and penalties, as it has with fines imposed by the Income Tax Act.

On this motion, the Crown argued that it should be open to it to establish that the “egregious or repulsive” principle could also apply in respect of amounts paid in order to settle litigation. CIBC contended that this concept has never been held to apply to settlement amounts and that, as a result, the Reply was fatally deficient.

Associate Chief Justice Rossiter first concluded that part of a pleading should only be struck where it is “certain to fail because it contains a radical defect.” Here, the Crown was trying to use the “egregious or repulsive” principle to justify denying the deduction of amounts paid to settle a law suit rather than amounts laid out to pay fines. The Court acknowledged that the “egregious or repulsive” principle had been developed by the courts in the context of fines, but noted that it could apply to settlement payments, and so the Respondent’s pleadings did have a chance of success. He refused to strike the Crown’s entire pleading as a result.

However, Associate Chief Justice Rossiter found that in the Reply the Crown pleaded evidence, conclusions of law or mixed fact and law, immaterial facts or advanced prejudicial or scandalous claims or claims that were an abuse of process of the Court. In the result, the Court held that portions of the Reply were improper and had to be removed. The Crown was given 60 days to file a less argumentative Amended Reply with the offending portions deleted.

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Successful Challenge to Portions of the Crown’s Reply on the Deductibility of Amounts Paid by CIBC to Settle Enron Litigation

Payments from a Ponzi scheme held to be non-taxable

The Tax Court recently released a decision dealing with the issue of whether gains realized by an unwitting participant in a Ponzi scheme are taxable.  In Johnson v. The Queen, 2011 TCC 540, the taxpayer had invested $10,000 with Andrew Lech (“Lech”).  They agreed he would invest the funds in options and pay her profits minus commissions.  The scheme paid the appellant $614,000 in 2002 and $702,000 in 2003.  However, the reality was that Lech was simply shuffling the money around between various accounts and other investors.  Further, Lech told the appellant that his family trust paid all the income tax on the investment and, therefore, the Appellant need not be concerned about paying tax.  Lech’s scheme fell apart in 2003 and he was later sentenced to jail.

The Minister assessed the Appellant for the gains she received from the scheme in 2002 and 2003.  She appealed, saying the payments were not taxable because they were not from a source of income as required by paragraph 3(a) of the Income Tax Act.  The Respondent stated that the gains were income that arose from capital she had invested with Lech, and were not windfalls exempt from tax.

The Court held that the profits from the scheme were not taxable, finding there was precious little connection between the capital invested and the gains received because the gains were taken from other investors and did not arise from any actual investment.  Further, the profits did not arise from the investment agreement with Lech because he had never intended to comply with that agreement.  Finally, the Court applied the criteria from Cranswick and held that the payments were akin to windfalls because they were funds passed on to the appellant through the fraudulent actions of Lech and did not represent a return on invested capital.

The Court also held the Minister was statute-barred from reassessing the Appellant’s 2002 taxation year in any event (although the Court found that the Appellant was careless in respect of her 2003 return, and thus if the Court found that the gains were taxable, her 2003 taxation year would have been open to reassessment).

As of the time of posting, the Crown has not filed an appeal to the Federal Court of Appeal.

It will be interesting to see how US Courts will deal with investors who profited from the Bernie Madoff scandal in 2009.  There has already been some consideration of the issue of the taxation of profits from a Ponzi scheme in earlier US jurisprudence.  In Premji (T.C. Memo. 1996-304) the US Tax Court ruled that an interest payment received from a Ponzi scheme should have been included in the taxpayer’s gross income because the payment was not a return of capital.  See also IRS CCA 200451030.

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Payments from a Ponzi scheme held to be non-taxable

Tax Court of Canada: The GAAR Does Not Apply to Disallow Deduction of a $5.6 Million Business Loss

On October 28, 2011 the Tax Court of Canada released Judgment and Reasons for Judgment of the Honourable Justice Judith Woods in Global Equity Fund Ltd. v. Her Majesty The Queen, 2011 TCC 507.  Global Equity Fund Ltd. (“Global”) had appealed the application of the General Anti-Avoidance Rule (the “GAAR”) by the Minister of National Revenue (the “Minister”) to disallow the deduction of a $5,600,250 business loss incurred on the sale of shares in a private corporation.

The Court found that the loss was produced after Global subscribed for shares of a new subsidiary corporation, which then issued preferred shares to Global which were redeemable and retractable for $5,600,250 but had a paid up capital of $56 and which resulted in an income inclusion of $56.  The stock dividend had the effect of reducing the fair market value of the shares of the new subsidiary to a nominal amount but did not affect Global’s adjusted cost base in those shares.  Global then disposed of the common shares to a newly settled family trust at a loss in the amount of $5,600,250.

The Court did not accept Global’s argument that the transactions leading up to the loss were implemented for creditor protection purposes.  Accordingly the Court held that a number of transactions in issue were avoidance transactions within the meaning of subsection 245(3) of the Income Tax Act (the “Act”).

The Court also noted that this case was similar to two recent decisions of the Tax Court of Canada where similar strategies were used by other taxpayers to create capital losses. In both cases (Triad Gestco Ltd. v. The Queen, 2011 TCC 259 and 1207192 Ontario Ltd. v. The Queen, 2011 TCC 383) the Tax Court upheld the application of the GAAR to deny the losses.  The Court noted that both of these decisions are under appeal to the Federal Court of Appeal.

However, in Global’s case the Court was not prepared to accept the Crown’s argument that the object and spirit of the provisions of the Act identified by the Crown evidenced a policy to disallow losses realized within an economic unit to real losses.  The Court held that Parliament did not intend that the object and spirit of provisions identified by the Crown which targeted capital losses were intended to inform as to the object and spirit of the provisions relied upon by Global in the facts of this case.

Relying on the Supreme Court of Canada decision in Canada Trustco Mortgage Co. v. The Queen (2005 SCC 54), Justice Woods held that the provisions in the Act relied upon by Global to produce the losses had not been misused and she was also unable to discern a general policy from these provisions that restricted business losses in the manner suggested by the Crown.  The Tax Court rejected the Crown’s argument that there was a general restriction against the deduction of artificially-created business losses.  For all of these reasons the Tax Court held that the Minister had not met the onus of establishing abusive tax avoidance under subsection 245(4) of the Act and allowed the appeal.

[Note: The author, along with Jehad Haymour of Fraser Milner Casgrain LLP, acted as counsel for Global – Ed.]

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Tax Court of Canada: The GAAR Does Not Apply to Disallow Deduction of a $5.6 Million Business Loss

Tax Court of Canada Authorizes Commission Evidence to be Taken in the U.S. on an Art Valuation Case: Sackman v. The Queen

On October 21, 2011, the Tax Court of Canada (Justice Valerie Miller) released her decision on a motion brought by the Crown for commission evidence to be taken in California from an art dealer (see our earlier post). The Court held that the art dealer’s testimony is material to the appeal, which deals with the valuation of artwork in the context of a charitable donation program, and ordered that a Commission and a Letter of Request be issued to allow the examination of Mr. Sloan in California under section 112 of the Tax Court of Canada Rules (General Procedure).

The Court took into account the following factors in exercising its discretion to make the order:

(a) the convenience of the person whom the party seeks to examine,

(b) the possibility that the person will be unavailable to testify at the hearing by reason of death, infirmity or sickness,

(c) the possibility that the person will be beyond the jurisdiction of the Court at the time of the hearing,

(d) the expense of bringing the person to the hearing,

(e) whether the witness ought to give evidence in person at the hearing, and

(f) any other relevant consideration.

The Court was satisfied that the Crown had fulfilled the traditional tests for commission evidence, namely:

1. the application is made bona fide;

2. the issue is one which the court ought to try;

3. the witnesses to be examined can give evidence material to the issue;

4. there is some good reason why he or she cannot be examined here.

The only real issue was materiality of the dealer’s evidence.  The Crown submitted that its:

. . . theory of the case is that there was no identifiable market for the prints before Coleman, Silver and Artistic [the promoters] created a market through the donation program. Mr. Sloan is able to give evidence concerning the origins of the donation program and the absence of any discernible market for the artwork before it was packaged as part of the Artistic program. His testimony is also necessary to authenticate documents necessary to challenge the appellant’s anticipated expert evidence.

The Court also noted that the Crown is entitled “to put its best foot forward in this litigation” and should be allowed to obtain the evidence necessary to accomplish that objective.

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Tax Court of Canada Authorizes Commission Evidence to be Taken in the U.S. on an Art Valuation Case: Sackman v. The Queen

Transfer Pricing Case Opens in the Tax Court of Canada – McKesson Canada Corporation v. The Queen

A transfer pricing trial commenced on October 17, 2011, in the Tax Court of Canada in Toronto.  Mr. Justice Patrick Boyle will decide whether paragraph 247(2)(a) of the Income Tax Act (the “Act”) applies to the transaction at issue (the factoring of accounts receivable) to reduce the deduction of an amount paid by a Canadian corporation to a non-resident affiliate which assumed the risks of collecting the Canadian corporation’s accounts receivable.  The agreed-upon discount rate was 2.2% but the Minister of National Revenue (the “Minister”) says it would have been just over 1% had the parties been dealing at arm’s length.  The trial is expected to take approximately 6-7 weeks.  The hearing began on Monday, October 17, 2011 with an opening statement by counsel for the Appellant, McKesson Canada Corporation (“McKesson Canada”).

McKesson Canada contracted to sell its accounts receivable to a related, non-resident company, McKesson International Holdings III S.à R.L. (“McKesson International”). McKesson Canada and McKesson International agreed to a variable discount rate that would be applied to the accounts receivable.  The rate was calculated using a formula that resulted in a discount rate of 2.2% for the 2003 taxation year.  According to the terms of the agreement, all bad debt risk relating to the accounts receivable that were sold was assumed by McKesson International. The discount rate was intended to compensate McKesson International for assuming the risk that some of the accounts receivable may not be collected and would have to be written off.

The Minister disallowed a portion of the amounts deducted by McKesson Canada in respect of the discount on the sale of accounts receivable. The Minister determined that, based on the terms and conditions in the agreement, the discount rate that would have been agreed upon had the parties dealt with one another at arm’s length would not have exceeded 1.0127%. Accordingly, the Minister added some $26 million to the Appellant’s income for its 2003 taxation year, reflecting a discount rate of 1.0127% rather than the rate of 2.2% as agreed by the parties.

In his opening statement, counsel for McKesson Canada contended that the issue should be whether the discount rate agreed upon by the parties was appropriate for an arm’s length transaction given the amount of risk that was being transferred from the vendor to the purchaser of the accounts receivable and that the issue should not be what the discount rate should be if the principal terms of the contract were changed to reflect some other hypothetical agreement used by the Minister for purposes of his assessment.

In addition to the Part I appeal, there is a Part XIII appeal as well. The issue there is whether McKesson Canada conferred a benefit on its controlling shareholder, McKesson International, under subsection 15(1) of the Act by selling certain of it accounts receivable and, therefore, whether McKesson Canada should be deemed to have paid a dividend to McKesson International under paragraph 214(3)(a) of the Act. Including interest, the Part XIII assessment is approximately $1.9 million.

In conclusion, counsel for McKesson Canada argued that the Part XIII assessment is barred by virtue of the Canada-Luxembourg Income Tax Convention (1999) (the “Treaty”), which is applicable since McKesson International is a company existing under the laws of Luxembourg. As Article 9(3) of the Treaty includes a five year time limit for changes by Canada to the income of a taxpayer, the time for the adjustment expired on March 29, 2008 (before the Part XIII assessment was mailed).

The hearing continues.

For the link to the Part I Notice of Appeal, click here.

For the link to the Part I Amended Reply, click here.

For the link to the Part XIII Amended Notice of Appeal, click here.

For the link to the Part XIII Reply, click here.

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Transfer Pricing Case Opens in the Tax Court of Canada – McKesson Canada Corporation v. The Queen

Request for Commission Evidence in the Tax Court of Canada – Sackman v. The Queen

On October 14, 2011, the Tax Court of Canada heard a Crown motion requesting an order for commission evidence in the case of Sackman v. The Queen (Court file 2002-4824(IT)G). The issue in the appeal is whether the amount Mr. Sackman is entitled to claim as a charitable deduction for artwork obtained from Artistic Ideas Inc. and donated to various charities is (a) the appraised value of the artwork or (b) the purchase price of the artwork.

The motion was brought by the Crown so that the Tax Court may receive the evidence of Mr. Paul Sloan (who lives in California) prior to the hearing pursuant to Section 119 of the Tax Court of Canada Rules (General Procedure). Mr. Sloan had provided works of art to Artistic Ideas Inc., which he obtained through past ownership of various art galleries in the United States.

The Crown argued that Mr. Sloan’s evidence is material. In light of the fact that Mr. Sackman obtained the artwork from Mr. Sloan, Mr. Sloan could provide evidence as to the true value of the artwork. The Crown described the test in GlaxoSmithKline Inc. v. The Queen, which sets out the factors the Tax Court will consider in determining whether to grant a request for commission evidence. The Crown submitted that the request satisfied those criteria.

Counsel for Mr. Sackman submitted that the crux of the GlaxoSmithKline test is to determine whether the evidence is relevant to the case. Counsel argued that the Crown had not provided any evidence or support, either in its written or oral submissions, to demonstrate why Mr. Sloan’s evidence will be material. Counsel also submitted that should the Court grant the request for commission evidence, Mr. Sackman would be prejudiced through yet another delay (the Notice of Appeal was filed on December 16, 2002). Finally, counsel argued that the value of the artwork was supported by reputable appraisers and the manner in which the artwork was acquired or the individual from whom it was acquired should have no bearing on the decision of the Court.

Justice Valerie Miller reserved judgment on the motion.

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Request for Commission Evidence in the Tax Court of Canada – Sackman v. The Queen