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Taxable in Canada? Not a Black and White Situation

In Black v. The Queen (2014 TCC 12), Lord Conrad Black argued that he was not subject to tax in Canada on certain income and taxable benefits. Both Lord Black and the CRA agreed that he was a resident of both Canada and the U.K. in 2002, and that under Article 4(2)(a) of The Canada-United Kingdom Income Tax Convention (the “Convention”) he was a “deemed” resident of the U.K. for the purposes of the Convention.

Lord Black had filed his Canadian tax return for 2002 on the basis that some $800,000 of income from the duties of offices or employments performed by him in Canada was taxable in Canada. However, Lord Black did not include certain other remuneration and benefits totalling $5.1 million in his Canadian income, including some $2.8 million of income from the duties of offices or employments performed outside Canada, $326,177 of taxable dividends, $365,564 of shareholder benefits, and $1.3 million of benefits arising as a result of his use of an airplane owned by Hollinger International Inc.

At the Tax Court hearing, Lord Black argued that by virtue of his “deemed” U.K. residency these other amounts were not taxable in Canada. As it happens, since he was not domiciled in the U.K., Lord Black was subject to tax in the U.K. only on the portion of his non-U.K. source income that was remitted to or received in the U.K.

The CRA alleged that, notwithstanding Lord Black being deemed a U.K. resident for the purposes of the Convention, he was subject to Canadian tax on income and benefits that were not covered by the Convention.

The Tax Court dismissed Lord Black’s appeal and held that he could be a deemed resident of the U.K. for purposes of the Convention and also be a resident of Canada for purposes of the Canadian Income Tax Act. Chief Justice Rip noted that the arguments presented on behalf of Lord Black had no supporting authority and were contrary to the liberal and purposive approach that must be taken when interpreting a tax treaty.

In applying a liberal and purposive approach to Article 4(2) of the Convention, the Tax Court noted that the tie-breaker rule at issue merely provided a preference to the taxing authority of the U.K., but did not extinguish Canada’s claim to tax. Lord Black’s argument that there was an inconsistency between the Income Tax Act and the Convention was incorrect as it did not take into account the role of Article 4 in allocating taxing jurisdiction to avoid double taxation. As such, Lord Black was unable to point to any provision in the Convention that would result in double taxation if he were resident in Canada.

Lord Black also sought to rely on Article 27(2) of the Convention, which addressed the tax treatment of non-domiciled residents of the U.K. who are required to pay tax on foreign income only when received in the U.K. Article 27(2) essentially provides that where a person is subject to income tax in the U.K., and the Convention provides for tax relief in Canada, the tax relief will only be in respect of the amount of income that is actually taxed in the U.K. Thus, Lord Black argued that the Minister could not assess his non-Canadian income because none of the income was remitted or received in the U.K., and so there was no tax from which he could have been relieved in Canada.

Since the Tax Court had already determined that Lord Black was a resident of Canada for purposes of the Income Tax Act, the argument based on Article 27(2) could not succeed. The Tax Court agreed with the CRA that the Convention allocates the right to tax between Canada and the U.K. on an item-by-item basis, and any items not covered by the Convention were thus subject to tax on the basis of Lord Black’s residence in Canada. As a resident of Canada, Lord Black was subject to tax on his worldwide income, including income earned in the U.S.

We note that both parties agreed that subsection 250(5) of the Act, which deals with the deemed non-residency of a Canadian where the individual is deemed to be a resident in another country by virtue of a tax treaty, did not apply. This was because of the “grandfathered” application of subsection 250(5) (i.e., the provision is not applicable to a Canadian resident individual who was (i) a resident of two countries and (ii) deemed resident of one of those countries under a tax treaty at the time the subsection became effective in 1999). If subsection 250(5) had applied, then Lord Black would not be a resident of Canada for the purposes of the Income Tax Act.

On January 22, 2014, Lord Black filed his appeal in the Federal Court of Appeal (File No. A-70-14).

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Taxable in Canada? Not a Black and White Situation

Federal Court of Appeal Affirms Tax Court Decision that Free Parking at School is a Taxable Benefit in the “Branksome Hall” Cases

On December 1, 2011, the panel of Justice John Maxwell Evans, Justice Carolyn Layden-Stevenson and Justice David Stratas of the Federal Court of Appeal heard the “Branksome Hall” parking cases (Geraldine Anthony, Heather Friesen, Leslie Morgan, Jarrod Baker v. The Queen (2011 FCA 336)). The appeals were dismissed with a unanimous judgment delivered from the bench by Justice Layden-Stevenson shortly after Appellants’ counsel concluded his oral argument.

As discussed in an earlier post, the appeals of four employees of Branksome Hall (a private school in Toronto) (the “Appellants”) were heard collectively as test cases and on common evidence. The Appellants and approximately 100 other employees of Branksome Hall were reassessed for their 2003 and 2004 taxation years to include $92 per month (inclusive of GST and PST) in their income, representing the value of free parking provided by their employer. The issues were whether parking provided to the Appellants by their employer was a taxable benefit under paragraph 6(1)(a) of the Income Tax Act (the “Act”) and, if so, how the value of that benefit should be assessed.

Counsel for the Appellants argued in his opening statement that this is a case of the Canada Revenue Agency casting its tax net as wide as possible and attempting to tax items that it had not taxed in the past. In response to this statement, Justice Evans noted that the Federal Court of Appeal is required to apply the law as prescribed under paragraph 6(1)(a) of the Act and not make any findings on the practices of the Canada Revenue Agency.

The Appellants’ submissions focused on Justice Brent Paris’ conclusion in the Tax Court of Canada that the value of the taxable benefit was its fair market value. They argued that fair market value should only be applied to cases where there is an open market to test competitive prices. Since the demand for parking at Branksome Hall only came from staff members and Branksome Hall was restricted from charging members of the public for parking as a result of zoning restrictions, there was no open market and, therefore, fair market value should not be applied. The Appellants submitted that the value of the taxable benefit should be determined by considering only the cost incurred by the employer to provide the benefit.

In delivering reasons for judgment on behalf of the panel, Justice Layden-Stevenson stated that the Court: a) agrees with the Tax Court’s finding that even if it is accepted that the parking benefit to the Appellants should be valued at Branksome Hall’s cost of providing the parking, the evidence adduced by the Appellants was not sufficient to prove what those costs were; b) rejects the argument that the fair market value is an appropriate method of valuation only when there is an open market for the benefit in issue; and c) finds that the Appellants’ argument has been overtaken by the decision of the Federal Court of Appeal in Spence v. The Queen (2011 FCA 200).

In Spence v. The Queen (2010 TCC 455), the Tax Court had valued an employment benefit of reduced tuition costs by using the cost approach instead of the fair market value approach. The Federal Court of Appeal reversed the Tax Court’s decision and applied the fair market value approach to the taxable benefit on June 13, 2011 – after the Appellants in the “Branksome Hall” cases had submitted their Memorandum of Fact and Law.

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Federal Court of Appeal Affirms Tax Court Decision that Free Parking at School is a Taxable Benefit in the “Branksome Hall” Cases

Taxable Benefits for Parking at School? Federal Court of Appeal to Consider the “Branksome Hall” Cases

All parties in the “Branksome Hall” parking cases (Geraldine Anthony, Heather Friesen, Leslie Morgan, Jarrod Baker v. The Queen) have filed their Memoranda of Fact and Law in the Federal Court of Appeal. The hearing has been scheduled for December 1, 2011 in Toronto.

The issues are whether parking provided to the Appellants by their employer (a private school in Toronto) was a benefit taxable under paragraph 6(1)(a) of the Income Tax Act (the “Act”) and, if so, how the value of that benefit should be assessed.

The Appellants, along with approximately 100 other employees of Branksome Hall, were reassessed for their 2003 and 2004 taxation years to include $92 per month (inclusive of GST and PST) in their income representing the value of free parking provided by their employer. These four appeals were chosen as test cases and were heard on common evidence.

In the decision of the Tax Court, Mr. Justice Brent Paris found that (a) the Appellants received a taxable benefit within the meaning of paragraph 6(1)(a) of the Act because they had a right to a parking spot by virtue of their employment, the benefit to them was not incidental to any benefit to their employer and they saved money by being given a parking spot, (b) relying on Schroter v. The Queen (2010 FCA 98), the value of that taxable benefit was its fair market value and (c) the fair market value of the taxable benefit was $75 per month in 2003 and $77 per month in 2004.

The Appellants take issue with the finding of a taxable benefit in the circumstances and the legal test used by the Tax Court to determine its quantum. The Appellants argue that there was no economic benefit to them and the provision of parking was incidental to the infrastructure of their place of employment. They also contend that their case is nothing like Schroter v. The Queen, in which a corporate executive was rewarded with a free parking pass at his downtown office tower on his promotion. If the free parking at Branksome Hall is determined to be a taxable benefit, the Appellants argue that the value should be computed on the basis of the employer’s cost of providing that privilege, which is “in accordance with the text, context and purpose of [the Act], provides certainty, predictability and fairness, and is most appropriate in this case.” Finally, the Appellants argue that the Tax Court’s decision would have far reaching implications if left undisturbed. For example, a domestic caregiver who enjoys free parking on the driveway of an employer’s home would potentially be subject to tax on that “benefit”.

For the written submissions of the appellants, see the Memorandum of Fact and Law of Geraldine Anthony, Jarrod Baker, Leslie Morgan and Heather Friesen.

For the written submissions of the respondent, see the Memorandum of Fact and Law of the Crown.

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Taxable Benefits for Parking at School? Federal Court of Appeal to Consider the “Branksome Hall” Cases