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Moore v. Getahun: Expert Witnesses

On January 29, 2015, the Ontario Court of Appeal released its widely-anticipated reasons in Moore v. Getahun (2015 ONCA 55).

In the lower court’s controversial decision released last year, the court criticized the practice of counsel reviewing draft expert reports and communicating with experts. The court stated that counsel should not review or comment on draft expert reports because of the risk that such reports could be shaped by the views expressed by counsel. This criticism caused considerable concern in the legal profession, as well as in the community of expert witnesses (see our previous post on the Moore case here).

The Court of Appeal dismissed the appeal, holding that the determinations made on the expert evidence issue by the lower court judge did not affect the actual outcome of the trial.

Importantly, Justice Sharpe, writing for the majority of the Court of Appeal, held that the trial judge erred in concluding that it was improper for counsel to assist an expert witness in the preparation of the expert’s report.

Justice Sharpe stated that “the ethical and professional standards of the legal profession forbid counsel from engaging in practices likely to interfere with the independence and objectivity of expert witnesses” and that “it would be bad policy to disturb the well-established practice of counsel meeting with expert witnesses to review draft reports.”

Justice Sharpe further stated that “[C]ounsel play a crucial mediating role by explaining the legal issues to the expert witness and then by presenting complex expert evidence to the court.  It is difficult to see how counsel could perform this role without engaging in communication with the expert as the report is being prepared.”

With respect to the issue of continuous disclosure of consultations regarding draft reports, Justice Sharpe held that “absent a factual foundation to support a reasonable suspicion that counsel improperly influenced the expert, a party should not be allowed to demand production of draft reports or notes of interactions between counsel and expert witnesses.”  In Justice Sharpe’s view, making preparatory discussions and drafts subject to automatic disclosure would be contrary to existing doctrine and would inhibit careful preparation.  Further, compelling production of all drafts, good and bad, would discourage parties from engaging experts to provide careful and dispassionate opinions, but would instead encourage partisan and unbalanced reports.  Moreover, allowing open-ended inquiry into the differences between a final report and an earlier draft would run the risk of needlessly prolonging proceedings.

Accordingly, the Court of Appeal rejected the trial judge’s holding that counsel should not review draft reports with experts, as well as her holding that all changes in the reports of expert witnesses should be routinely documented and disclosed.

The Court of Appeal’s decision in Moore seems to have lifted the haze caused by the trial judge’s decision and clarified the role of the expert and the manner in which expert reports are to be prepared under the 2010 amendments to rule 53.03 of the Ontario Rules of Civil Procedure. Further, the Court of Appeal’s decision is important guidance in respect of the preparation and presentation of expert reports in trial courts across the country.

Moore v. Getahun: Expert Witnesses

ConocoPhillips: FCA Confirms Tax Court’s Jurisdiction to Determine Questions of Timing and the Validity of a Notice of Objection

In ConocoPhillips Canada Resources Corp. v. The Queen (2014 FCA 297), the Federal Court of Appeal overturned a Federal Court decision (2013 FC 1192) and dismissed an application for judicial review by the taxpayer finding that the Federal Court lacked jurisdiction in this case.

ConocoPhillips had commenced an application for judicial review as a result of a dispute between the CRA about whether a Notice of Reassessment had been validly sent to the taxpayer.  The CRA alleged that it mailed a Notice of Reassessment on November 7, 2008. ConocoPhillips alleged that it never received the Notice of Reassessment and that it first learned of the reassessment on April 14, 2010.

Accordingly, when ConocoPhillips filed a Notice of Objection on June 7, 2010, the CRA advised that it would not consider the objection on the grounds that it was not filed within 90 days of the alleged mailing date (i.e., November 7, 2008) and that no request for an extension of time was made within the year following the alleged mailing date of the reassessment.

The Federal Court considered the question of jurisdiction and found that it had jurisdiction because the Court was not being asked to consider the validity of the reassessment (which can only be determined by the Tax Court of Canada) but rather, was only being asked to review the CRA’s decision not to consider the objection.

Based on the standard of reasonableness, the Federal Court found in favour of ConocoPhillips on the basis that the CRA had not sufficiently engaged the evidence to appropriately render an opinion whether or not the reassessment was mailed on the alleged date. The Court set aside that decision.

The Crown appealed to the Federal Court of Appeal on the basis that the Federal Court lacked jurisdiction on this issue.  The Federal Court of Appeal allowed the appeal.

Section 18.5 of the Federal Courts Act provides that judicial review in the Federal Court is not available where, inter alia, an appeal is permitted on the issue before the Tax Court of Canada.  In the present case, the Federal Court of Appeal stated that, pursuant to subsection 169(1)(b) of the Income Tax Act (Canada), ConocoPhillips could have appealed to the Tax Court after 90 days had elapsed following the date its objection was initially filed and the Tax Court would have been the correct forum to determine if, or when, the Notice of Reassessment was mailed and when the time for filing a Notice of Objection expired.

The Federal Court of Appeal clarified that the Minister’s obligation to consider a Notice of Objection is triggered regardless of whether a Notice of Objection may have been filed within the required time-frame. Further, the Minister’s decision on this issue is not an impediment to filing an appeal to the Tax Court pursuant to paragraph 169(1)(b) of the Income Tax Act (Canada). Accordingly, judicial review of this issue was not available in the Federal Court.

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ConocoPhillips: FCA Confirms Tax Court’s Jurisdiction to Determine Questions of Timing and the Validity of a Notice of Objection

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

Foreign Charities and the Changing Landscape of CRA Charity Audits

There has been a flurry of recent scrutiny and activity in the areas of foreign and domestic charities – few foreign charities remain on the list of qualified donees since the changes to the definition of “qualified donee” in the Income Tax Act, and the CRA’s Charities Directorate appears to have taken a keen interest in the political activities of certain domestic charities.

Donors and charities would be prudent to monitor these developments and obtain professional advice where necessary.

Foreign Charities

Before 2013, a “qualified donee” under the Income Tax Act automatically included those foreign charities to which the Canadian government had made a gift in previous years (within a certain timeframe). However, that changed when the definition of qualified donee was amended to include only those foreign organizations that have applied to the CRA for registration, which would be granted if the foreign charity received a gift from the Canadian government and the CRA was satisfied that the foreign charity is carrying on relief activities in response to a disaster, providing urgent humanitarian aid, or carrying on activities in the national interest of Canada.

The CRA website lists only one foreign charity that has been registered – The Bill, Hillary and Chelsea Clinton Foundation. The CRA website also lists those organizations that had received gifts from the Canadian government before the changes to the definition of qualified donee.

Political Activities and CRA Charity Audits

The foreign charity changes occurred around the same time the CRA Charities Directorate increased its “political activities compliance efforts”. In general, charities are restricted from engaging in or supporting political activities unless those activities are wholly subordinate to their other charitable purposes. The CRA’s administrative position is that a charity must devote less than 10% of its total resources in a year to political activities.

The CRA focus on charities and political activities sparked many media articles raising the issue of whether the CRA’s auditing practices were themselves inherently politically-motivated (see articles here, herehere and here).

Cathy Hawara, the Director General of the CRA’s Charities Directorate, has denied accusations that these charity audits were politically motivated (see Ms. Hawara’s speech to the CBA Charity Law Symposium on May 23, 3014). The CRA also publicly stated that recent audits of charities were intended to focus on all types of charities and not only those with certain political inclinations. Further, the CRA has recently published a Charities Program Update which (among other things) aims to increase the transparency of its audits in the charitable sector and provide guidance as to how audits for charities involved in political activities are conducted. However, at the same time, the CRA has publicly stated that it will not divulge the guidelines for political activity audits of charities.

The controversy surrounding the CRA’s audit selection process persists. On September 15, 2014 a letter signed by 400 academics was released, demanding that the CRA halt its audit of the Canadian Centre for Policy Alternatives (“CCPA”). This letter was sent in response to the release of a CRA document obtained by the CCPA pursuant to an access to information request wherein the CRA states the reason for audit as follows: “A review of the Organization’s website… suggests that the Organization may be carrying out prohibited partisan political activities, and that much of its research/educational materials may be biased/one-sided.”

In their letter, the academics counter that “critical policy analysis does not equate with political activism, nor is it ‘biased’ or ‘one-sided’.” They argue that there is legitimate concern that charities are now self-censoring to avoid aggravating auditors and this audit activity will stifle sound, effective, and legitimate research.

On October 20, 2014, the Broadbent Institute released a report that adds further momentum to the speculative argument that the CRA is less interested in compliance and more interested in politically-motivated retribution against government critics (see also here).

The report highlights 10 “right-leaning” charities that have apparently escaped CRA audit, despite making public statements that may indicate that such charities are carrying out political activities without reporting them. The report concludes by suggesting that an impartial inquiry into the CRA’s audits of charitable organizations is the only way to come to a clear conclusion on this controversial matter.

The message is clear. The CRA is increasing scrutiny on political activities in the charitable sector. Charities should take active steps to ensure that they are compliant with applicable legislation.

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Foreign Charities and the Changing Landscape of CRA Charity Audits

B.C. Supreme Court Rescinds Land Transfers

In Re 0741508 BC Ltd and 0768723 BC Ltd  (2014 BCSC 1791), the British Columbia Supreme Court (“BCSC”) considered whether rescission should be granted in respect of two real estate transactions in which the applicant corporations had transferred several parcels of land to a partnership.

The transactions were undertaken as part of a proposed commercial development of the land. The parties intended – in accordance with industry practice – that there would be no net GST/HST payable on the land transfers (i.e., the GST/HST payable would be offset by an input tax credit).

However, the partnership was not registered for GST/HST purposes under the Excise Tax Act (“ETA”) and accordingly the input tax credit was not available. The CRA audited members of the corporate group and reassessed nearly $6 million in GST/HST and penalties.

The parties brought an application to the BCSC for rescission of the transfers (i.e., to effectively put the property back in the hands of the selling corporations).

The application was opposed only by the CRA, which argued that rescission should not be available as the mistake in question was not related to the purpose of the transaction but only its consequences. In Gibbon v Mitchell ([1990] 1 W.L.R. 1304 (Ch.), a U.K. court held that rescission would be granted for a mistake where “the mistake is as to the effect of the transaction itself and not merely as to its consequences or the advantages to be gained by entering into it”. Similar reasoning was followed by the Ontario court in 771225 Ontario Inc. v Bramco Holdings Co Ltd. ([1994] 17 O.R. (3d) 571 (Gen. Div.)), which held that an assessed land transfer tax “was a consequence of the transaction, rather than its purpose, and therefore the case did not fall within the strict confines of the rule for granting relief.”

In considering whether to exercise its discretion to order equitable rescission, the BCSC cited McMaster University v Wilchar Construction Ltd. ([1971] 3 O.R. 801 (H.C.)):

In equity, to admit of correction, mistake need not relate to the essential substance of the contract, and provided that there is mistake as to the promise or as to some material term of the contract, if the Court finds that there has been honest, even though inadvertent, mistake, it will afford relief in any case where it considers that it would be unfair, unjust or unconscionable not to correct it.

In the present case, the BCSC noted that, in Re: Pallen Trust (2014 BCSC 305) the court had rejected Gibbon and instead relied on the test adopted in the U.K. Supreme Court decision in Pitt v Commissioners for Her Majesty’s Revenue and Customs ([2013] UKSC 26) to determine whether to rescind a voluntary transaction.

Equitable rescission, under Pallen, would be available where there was a “causative mistake of sufficient gravity” as to the “legal character or nature of the transaction, or as to some matter of fact or law which is basic to the transaction” such that it would be unconscionable, unjust or unfair not to correct the mistake.

The BCSC noted that, in the transactions at hand, the intention of the parties had always been that the partnership would be registered under the ETA so that no net GST/HST would be payable. This was distinguishable from Bramco, where there had never been a specific intention to minimize the applicable tax.

The BCSC reiterated the principle set out in McMaster and Pallen that “if there has been an honest, even though inadvertent mistake, equity will afford relief in any case that the court considers that it would be unfair, unjust, or unconscionable not to correct it” and held that it would be unfair and unjust for either Canada and/or the Province to gain over $6 million plus accruing interest solely because of a mistake in not registering under the ETA.

The BCSC granted the rescission and held that there was “no adequate legal remedy available, the petitioners are not seeking to carry out retroactive tax planning, and there is no prejudice to third parties.”

The Court did not explicitly consider whether the mistake met the threshold of being of sufficient gravity as to the legal character, nature of the transaction, or as to some matter of fact or law which is basic to the transaction.  Presumably, the punitive and negative results of the transaction were sufficiently grave – that is, the mistake about the fact as to whether ETA registration had been completed was sufficiently grave – that the Court found rescission should be granted.

Pallen has been appealed to the B.C. Court of Appeal.  It will be interesting to see if the present case is appealed as well.  Either way, the equitable doctrine of rescission continues to develop in the context of unintended tax consequences.

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B.C. Supreme Court Rescinds Land Transfers

Bolton Steel Tube: TCC Orders Crown to Reassessment in Accordance with Settlement‏

In Bolton Steel Tube Co. Ltd. v. The Queen (2014 TCC 94), the Tax Court of Canada allowed the taxpayer’s motion requesting an Order that would require the CRA to reassess the taxpayer in accordance with the terms of a settlement agreement. In doing so, the Tax Court discussed certain principles regarding settlement agreements and the resulting reassessments.

In Bolton Steel Tube, the CRA reassessed the taxpayer for its 1994, 1995, 1996 and 1997 taxation years on the basis that the taxpayer failed to report income in each of those taxation years (the “2007 Reassessment”).

In 1996, the taxpayer reported $1.2 million of income. The CRA added approximately $600,000 of unreported income for total income of $1.8 million. During examinations for discovery, the CRA’s representative admitted that approximately $200,000 of the $600,000 increase should not have been made. Accordingly, for the 1996 taxation year, the maximum amount of income the CRA could have added as unreported income was $400,000. The CRA further confirmed this admission in its Reply.

On June 15, 2012, the taxpayer delivered to the Crown an offer to settle which proposed to settle the appeals on the basis that (i) the CRA would vacate the reassessments for 1994, 1995 and 1997, and (ii) the CRA would reassess the 1996 taxation year to add $403,219 to the taxpayer’s income and impose a penalty under subsection 163(2) of the Income Tax Act (the “Act”). The Crown accepted this offer without further negotiation, and the parties entered Minutes of Settlement on these terms.

Following the settlement, the CRA issued a reassessment that calculated the taxpayer’s income for its 1996 taxation year to be $2,266,291, essentially adding $403,219 to the $1.8 million that had been previously assessed (the “2012 Reassessment”). The result was illogical: The agreed amount of unreported income – $403,219 – was added twice, and the $200,000, which the CRA had admitted was not to be added to the taxpayer’s income, was included as well.

In requesting the Order, the taxpayer argued that:

The 2012 Reassessment was not supported on the facts and the law;

The 2012 Reassessment violated the principle that the CRA cannot appeal its own assessment; and

The 2012 Reassessment was made without the taxpayer’s consent, which would be required pursuant to subsection 169(3) of the Act.

The Crown argued that if the 2012 Reassessment was varied or vacated then there had been no meeting of the minds, the settlement was not valid, and the 2007 Reassessment should remain under appeal.

The Tax Court agreed with the taxpayer on all three arguments.

With respect to the first argument, the Tax Court found the CRA’s interpretation of the Minutes of Settlement to be “divorced from the facts and law”. The Crown’s position was unsupportable since settlements must conform with the long-standing principal from Galway v M.N.R. (74 DTC 6355 (Fed. C.A.)) that settlements must be justified under, and in conformity with, the Act. In Bolton Steel Tube, the Tax Court went as far to say “even if both parties consented to settling in this manner, it could not be permitted” and “there is nothing to support the [Crown’s] interpretation and nothing to support the [Crown’s] further contention that the [taxpayer] offered this amount in exchange for other years to be vacated”.

With respect to the arguments surrounding subsection 169(3) of the Act, the Tax Court found that the taxpayer had not consented to having its income increased by the amount in the 2012 Reassessment.

The Crown argued that subsection 169(3) of the Act, which allows the CRA to reassess an otherwise statute-barred year upon settlement of an appeal, also allows the CRA to increase the amount of tax which the CRA could reassess despite subsection 152(5) of the Act. Subsection 152(5) of the Act is the operative provision that prevents the CRA from increasing an assessment of tax. Here, the Tax Court maintained the longstanding principle that a reassessment cannot be issued that results in an increase of tax beyond the amount in the assessment at issue. This is tantamount to the CRA appealing its own reassessment, which is not permitted, and thus renders the 2012 Reassessment void. We note that the Tax Court also considered the 2012 Reassessment to be void on the basis that it was an arbitrary assessment.

The Tax Court rejected the Crown’s argument that the settlement was ambiguous and therefore there was no meeting of minds as would be required for a valid contract. The Crown argued that the settlement was not valid and therefore the years under appeal should remain in dispute. The Tax Court turned to fundamental principles of contractual interpretation and found that the contract validly existed since it could reasonably be expected that the Crown would have known that the addition of $403,219 was to be added to the appellant’s income as originally reported (i.e., $1.2 million) and not to the income amount in the 2007 Reassessment (i.e., $1.8 million).

Accordingly, the Tax Court rejected the Crown’s argument, found that the settlement was valid and that the Minister should reassess on the basis that $403,219 should be added to the taxpayer’s income as originally reported. Since the 2012 reassessment was not valid, and therefore did not nullify the 2007 reassessment, and a notice of discontinuance had not yet been filed, the Tax Court continued to have jurisdiction over the appeal.

The result of this motion was a clear victory for the taxpayer and for common sense. It serves as a reminder that precision is essential when entering into settlement agreements.

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Bolton Steel Tube: TCC Orders Crown to Reassessment in Accordance with Settlement‏

Roitelman: Fraud and the Due Diligence Defence

In Roitelman v. The Queen (2014 TCC 139), the Tax Court considered whether a director could establish that he had been duly diligent in his attempts to prevent his company’s failure to remit source deductions where he had delegated responsibility for the company’s bookkeeping and tax filings to an employee.


The taxpayer owned an electrical contracting business that focused primarily on commercial and industrial contracting, installations and service work. Initially, the taxpayer personally completed all payroll and remittance filings. As his business expanded, the taxpayer was required to travel more frequently, thus spending less time in his office. Consequently, the taxpayer hired and trained a bookkeeper. He oversaw her work and at the outset ensured remittances were made in a timely fashion. After the employee assumed responsibility for the bookkeeping, the corporation did not remain current in its remittance obligations.  From August 2005 to March 2008, the CRA sent five letters to the corporation regarding repeated failures to remit. From October 2006 to March 2008, the CRA sent seven Notices of Assessment in respect of the unremitted source deductions. The taxpayer did not receive nor was he personally aware of many of these letters and assessments. Later, after the bookkeeper had been dismissed, the taxpayer discovered hidden documents and unsent remittance cheques in various locations in the office.

For 2006 and 2007, the CRA assessed the taxpayer for directors’ liability for unremitted source deductions under subsection 227.1(1) of the Income Tax Act. The taxpayer appealed to the Tax Court and relied on the due diligence defence under subsection 227.1(3) of the ITA.

Tax Court

The Tax Court allowed the appeal. The Court found the taxpayer established a due diligence defence and thus he was not personally liable for the unremitted amounts.

The Court reviewed the key decisions on the issue, and noted that the applicable test from Buckingham v. The Queen (2011 FCA 142) is objective and contemplates the degree of care, diligence and skill exercised by the director in preventing a failure to remit. The Court also cited Balthazard v. The Queen (2011 FCA 331) for the proposition that after-the-fact behavior and corrective measures can be relevant in certain circumstances.

In Roitelman, the Court compared the personal actions of the taxpayer to the reasonably prudent person and emphasized that the director’s interaction with the bookkeeper should not be analyzed on in hindsight but, rather, with a view of the circumstances that existed during the relevant period:

[28] The test does not dictate that the positive steps taken must be effective in ensuring future compliance but only that a director takes those steps and that those steps would be the proactive steps that a reasonably prudent person would have exercised in comparable circumstances.

The Court stated that it was reasonable for the taxpayer to expect his bookkeeper to bring any essential correspondence to his attention, and it was reasonable for him to believe that when he signed remittance cheques that they were being forwarded to the Receiver General. There was no evidence that the taxpayer benefited or intended to benefit in any way from the company’s failure to remit.

Despite his actions (i.e., hiring and training the bookkeeper, delegating responsibility, etc.), the taxpayer was unable to discover or ascertain the extent of the remittance failures. The bookkeeper thwarted his attempts to ensure compliance. The Court held that the taxpayer could not reasonably have known that the bookkeeper would engage in fraudulent and misleading activities.

Roitelman is an interesting case because there are very few decisions in which a taxpayer is able to establish a due diligence defence where he/she delegates responsibility for bookkeeping/remittances and relies on the work of that other person. In Kaur v. The Queen (2013 TTC 227), the Tax Court stated, “… The director’s oversight duties with respect to [remittance obligations] cannot be delegated in their entirety to a subordinate, as was done in the present case.” In Roitelman, the taxpayer had admitted that he relied on “blind faith” that the remittances had been made in a timely fashion. However, the result in Roitelman reminds us that such reliance may still be reasonable where there was deceit and fraud perpetrated on the director by a subordinate.


Roitelman: Fraud and the Due Diligence Defence

Regulation of Bitcoin Around the World

Governments and tax authorities continue to develop their fiscal and tax positions relating Bitcoins. Many countries are releasing warnings about the risks associated with the use of Bitcoins, with some providing more concrete guidance on regulation and tax treatment of the digital currency.

Earlier this year, the United States Law Library of Congress surveyed over 40 countries for their official stances on Bitcoin to determine whether and how Bitcoins are used, regulated and taxed in those foreign jurisdictions. Most of the comments addressed three main themes: Bitcoin’s status (or lack thereof) as legal tender, consumer protection, and taxation.

Most notable in the survey are China and Brazil: Both countries have imposed significant regulations with respect to Bitcoins. In China, Bitcoins are treated as a special virtual commodity. It is not considered a currency, and banks and payment institutions are prohibited from dealing in Bitcoin. Brazil enacted a law in late-2013 that has created the possibility of normalization of electronic currencies like Bitcoin. The law lists the principles that must be observed by the payment arrangements and institutions, according to the parameters to be established by the Brazilian Central Bank.

Brazil stands alone with its Bitcoin regulation amongst its Central and South American counterparts. Neighboring jurisdictions have not provided for any formal regulation of the virtual currency despite its increased use. In Chile, a group of American Libertarians founded an organic farming community with an economy based on Bitcoins. In Nicaragua, an American banker bought a plot of land in one of the most important tourist areas in the country for 80 Bitcoins (roughly USD $72,000 at the time) and has since been encouraging the adoption of Bitcoin.

The United Kingdom announced that it will treat Bitcoins like any other form of payment for tax purposes: Value Added Tax will be due in the normal way from suppliers of any goods or services sold in exchange for Bitcoins. The European Union (EU) has passed no specific legislation relative to the status of the Bitcoin as a currency. In France, Germany, Finland and Estonia, the authorities have stated that Bitcoin is an alternative means of payment but not an official currency, and as a result revenues generated are subject to taxation.

The Central Bank of the Russian Federation stated that services of Russian legal entities aimed at assisting the exchange of Bitcoins for goods, services, or currencies are a “dubious activity” associated with money laundering and terrorism financing. The statement recommended that Russian individuals and legal entities refrain from transactions involving Bitcoins. Similarly, the Reserve Bank of India issued a public notice to users, holders and traders of virtual currencies (including Bitcoins) regarding the potential risks, financial and otherwise, to which they are exposed. Following the advisory, India’s largest Bitcoin trading platform suspended its operations, citing the notice.

At present, Hong Kong has no legislation directly regulating Bitcoins and other virtual currencies. However, existing laws provide sanctions against unlawful acts involving Bitcoins, such as fraud or money laundering. Singapore has reportedly published tax advice with respect to Bitcoins, noting that the digital currency is not considered a good nor does it qualify as currency but will be assessed under the Goods and Services Tax. Malaysia and Japan have not issued statements regarding Bitcoins.

As for the countries not surveyed by the United States or countries that have yet to take an official position on Bitcoins, time will tell as to how the digital currency will be adopted and integrated in different jurisdictions.

For now, the regulatory and tax discussions are as young as the currency. As Bitcoin use and acceptance increases, fiscal and tax authorities will face a more complex debate that will demand more than simply providing public warnings of the risk of Bitcoin use.


Regulation of Bitcoin Around the World

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

McIntyre: Not What You Bargained For?

When are the parties to a civil tax dispute bound by agreed facts from a criminal proceeding?

This was the question considered by the Tax Court of Canada on a Rule 58 motion made by the taxpayers in McIntrye et al v. The Queen (2014 TCC 111). Specifically, the taxpayers argued the principles of issue estoppel, res judicata, and abuse of process applied to prevent the Minister of National Revenue (the “Minister”) from assuming facts inconsistent with agreed facts from a prior criminal guilty plea.

In McIntyre, two individuals and their corporation were audited for the 2002 to 2007 tax years. The individuals and the corporation were charged with criminal income tax evasion. As part of a plea bargain, one individual and the corporation plead guilty based on certain agreed facts, and the court imposed sentences accordingly. The other individual was not convicted.

Subsequently, the Minister issued GST reassessments of the corporation, and further reassessments of the individuals for income tax. In issuing the reassessments, the Minister refused to be bound by the agreed facts from the criminal proceeding. In the Notices of Appeal in the Tax Court, the taxpayers argued the reassessments must be consistent with the agreed facts.

The taxpayers brought a motion under section 58 of the Tax Court Rules (General Procedure) for a determination of a question of law or mixed fact and law before the hearing of the appeals. Specifically, the taxpayers asked (i) whether the doctrines of issue estoppel, res judicata and abuse of process prevented the Minister from making assumptions inconsistent with the agreed facts, and (ii) whether the parties were bound by the agreed facts in respect of the calculation of certain capital gains, shareholder debts, losses and shareholder benefits.

The taxpayers argued that it was appropriate to deal with these issues before the hearing, whereas the Crown argued that these issues could not be determined on a Rule 58 motion because, in this case, the facts arose from a plea bargain rather than a determination by a court, the agreed facts did not address the GST liability of the corporation or the other individual’s income tax liability, and the facts (and tax liability) of a criminal proceeding would only prohibit the parties from alleging a lower tax liability in a civil proceeding.

The Tax Court dismissed the taxpayer’s motion. The Court considered the applicable test on a Rule 58 motion, namely that there must be a question of law or mixed fact and law, the question must be raised by a pleading, and the determination of the question must dispose of all or part of the proceeding (see HSBC Bank Canada v. The Queen, 2011 TCC 37).

The Court stated that, in this case, only the first two requirements were met:

[35] I agree with the Respondent’s analysis of the caselaw. It confirms that prior convictions in criminal proceedings resulting from plea bargains, although a factor that may go to weight in a civil tax proceeding, are not determinative of the relevant facts and issues in a subsequent tax appeal.

[38] In MacIver v The Queen, 2005 TCC 250, 2005 DTC 654, Justice Hershfield also concluded that a question is best left to the trial Judge where the motion is merely to estop a party from contesting certain facts that will not dismiss an entire appeal. As noted in his reasons, unless such a question can fully dispose of an appeal by finding that issue estoppel applies, a Rule 58 determination could do little more than split an appeal and tie the hands of the trial Judge.

The Court noted that the agreed facts did not address the corporate GST liability or the second individual’s income tax liability, dealt only with the 2004 to 2007 tax years, and did not address the imposition of gross negligence penalties. The Court concluded that issue estoppel would not apply because there was not a sufficient identity of issues between the criminal and civil proceedings. It would be unfair, the Tax Court stated, to prohibit the parties from adducing evidence in the civil tax appeals where there had been no introduction and weighing of evidence in the criminal proceeding.

McIntyre: Not What You Bargained For?