News of Note
BT Céramiques – Quebec Superior Court finds that the mere suspicion of tax evasion and corrupting CRA officials is insufficient to invalidate audit information
Email this ContentJarvis found that where the predominant purpose of a particular inquiry is the determination of a penal liability (e.g., under s. 239 of the ITA), CRA officials may not have recourse to the inspection and requirement tools in the ITA. In reversing the decision of the Court of Quebec to invalidate evidence obtained in a search and seizure of a Quebec registrant (BT Céramiques), which was believed to have fraudulently claimed input tax credits and corrupted CRA officials, Payette JCS stated:
When it commenced the audit, the CRA only had suspicions that BT Céramiques was engaged in tax evasion and that a “grand patron” in the CRA was assisting it. …
[T]he judge contrasted “auditing” and “investigation” … without noting that the audit powers themselves constitute powers of investigation, and without pausing to determine if the objective of the steps she described was to establish penal liability of the respondents.
Neal Armstrong. Summary of R. v. BT Céramiques Inc., 2017 QCCS 4262 under Charter s. 8.
Finance recognizes, as anomalous, the double deduction of the ACB of a corporate held life insurance policy in computing the CDA addition to two corporate beneficiaries of the proceeds
In 2017-0690311C6, Corporation A was the sole owner and premium payor for a life insurance policy with a death benefit of $1 million on the life of Mr. A. Corporation B and Corporation C were each designated as beneficiaries for 50% of the death benefit under this policy. Mr. A died after March 21, 2016 at a time that the adjusted cost basis of the policy to Corporation A was $200,000. CRA considered that the addition to the capital dividend account (CDA) of each of Corporation B and Corporation C was $300,000 (=$500,000-$200,000), not $400,000, i.e., the full ACB reduces the CDA addition for each rather than being prorated. Finance recognized that this result is anomalous, stating that:
The Department of Finance is prepared to address this issue as part of its ongoing review of the rules of the Income Tax Act.
Neal Armstrong. Summary of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.7 under s. 89(1) – capital dividend account – s. (d)(iii).
Finance indicates that extending s. 110.6(15)(a) to address disability coverage would raise potential policy issues
The two individual shareholders of a small business corporation agree that on the disability of either of them, his shares will be purchased out of the proceeds of a policy purchased by the corporation. What is the policy reason for not applying the s. 110.6(15)(a) cash-surrender-value rule so as to exclude the death benefit in determining whether the corporation qualifies as an SBC? Finance responded:
[T]he examination of such an issue could only be made in the context of a comprehensive review of the taxation of disability and critical illness insurance policies - unlike life insurance policies, the Act does not provide a comprehensive set of tax rules for disability and critical illness insurance policies. In addition, there may be significant differences between life insurance and disability or critical illness insurance, including the fact that an insured event under disability or critical illness insurance does not necessarily imply that the insured person ceases to participate in the corporation's business on a permanent basis.
Neal Armstrong. Summary of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.3 under s. 110.6(15)(a).
Finance “will consider situations where the application of [s. 220(3.5)] late-filing penalties creates a disproportionate burden on low-income taxpayers”
When queried about the onerous impact on middle-class individuals of being required under s. 220(3.5) to pay a late-filing federal penalty of $100 per month for a late-filed election, e.g., under s. 50(1), 86.1 or 45(2), Finance stated:
As part of the ongoing review of the ITA rules, the Department of Finance Canada will consider situations where the application of late-filing penalties creates a disproportionate burden on low-income taxpayers.
Neal Armstrong. Summary of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.12 under s. 220(3.5).
Finance states that the B2B rules in s. 15(2.16) are intended to apply mechanically irrespective whether s. 15(2) has been circumvented
Respecting the back-to-back loan rules in s. 15(2.16) et seq., Finance confirmed that “a right should not be considered a ‘specified right’ simply because the right secures debts that the shareholder of the corporation and the corporation itself owe to a financial institution.” Finance also stated:
Where the criteria set out in subsection 15(2.16) are satisfied, the shareholder benefit rules apply to an arrangement or mechanism, even if the facts and circumstances do not actually reveal an intention to circumvent the application of subsection 15(2). The rules are simply a function of the source of funds. This approach is consistent with the underlying technical approach of subsection 15(2), which is not articulated around a "purpose" test.
Neal Armstrong. Summaries of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.13 under s. 18(5) – specified right and s. 15(2.16).
Finance has no plans to rectify the potential double recognition of a loanback benefit under s. 118.1(16)
2009-0307941E5 dealt with two donors (not dealing with each other at arm’s length) who each made a cash gift to the same donee, and with one of the donors using part of the gift (as a result of the loan-back to it of gifted cash) as described in s. 118.1(16)(c)(ii). This resulted under s. 118.1(17) in a reduction not only in the amount of the gift made by that donor, but also by the other. In commenting on this situation, Finance stated:
[I]f two or more persons not dealing at arm’s length make a donation to the same charity, the use of the property donated by one of them will reduce the value of each one's gift, even if one of them does not use the property. These provisions clearly evince a demarcation between a property owned and used by a charity and a property owned and used by a donor. Adding a rule to apportion the reduction in the value of the gift would add a great deal of complexity to the tax rules surrounding charitable giving while opening the door to new opportunities for abuse of the provisions of the ITA.
Neal Armstrong. Summary of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.15 under s. 118.1(17).
CRA indicates that the s. 162(7) penalty for late-filing of a T1135 will be imposed automatically
In 2015-0588971C6, CRA indicated that the proposition that “the late-filing penalty of $2,500 under subsection 162(7) applies automatically… is currently under study.” Having completed that study, CRA is:
still of the opinion that [this penalty] applies automatically where all the conditions of that subsection are satisfied. …
CRA went on to acknowledge the six-year normal reassessment period under s. 152(4)(b.2), and referenced the exception thereto for neglect etc.
There will be circumstances where a taxpayer has a due diligence defence, for example, a reasonable view (albeit mistaken) that the situs of the property in question was in Canada. CRA’s answer appears to indicate that any such defence will be ignored at the initial assessment stage, and does not mention that is can be raised at the Notice of Objection stage.
Neal Armstrong. Summaries of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.14 under s. 162(7) and s. 152(4)(a)(i).
CRA indicates that (in the absence of counter indicators) a statutory declaration of residence is sufficient for s. 116(5)(a) purposes
S. 116(5)(a) (and similarly s. 116(5.3)) indicates that a purchaser is not liable for a failure to withhold under s. 116 on a purchase of taxable Canadian property from a non-resident if “after reasonable inquiry” it “had no reason to believe that the non-resident person was not resident in Canada.” When asked whether this requirement was met if the purchaser obtains a statutory declaration from the vendor that the vendor is not a non-resident of Canada, and the purchaser has no reason to believe this to be false, CRA indicated that “obtaining such declaration would generally qualify as a reasonable inquiry” – and referred to “a known mailing address outside of Canada or any other indication of the vendor’s residence being outside Canada in the transaction documentation” as examples of circumstances that should put the purchaser on notice.
This question is odd as usually there is only a written representation of residency in the sale agreement, and no statutory declaration to that effect.
Neal Armstrong. Summary of 25 August 2017 External T.I. 2017-0703351E5 under s. 116(5)(a).
CRA indicates that a simultaneous absorptive merger of FA3 (held by FA2) and FA2 (held by FA1) into FA1 would result in a disposition of the FA2 shares
Three wholly-owned stacked subsidiaries of Canco (FA1 holding FA2 holding FA3) effect a foreign merger under which FA2 and FA3 simultaneously merge into FA1, with FA1 as the survivor. FA2 and FA3 simultaneously cease to exist on the merger, resulting in the shares of FA2 and FA3 being cancelled.
CRA indicated that para. (n) of the s. 248(1) “disposition” definition (“Paragraph N”) would NOT deem there to be no disposition of the FA2 shares on the merger. The problem was the requirement in s. (iii)(B) of Paragraph N that “the disposing corporation [FA1] receives no consideration for the share [of FA2] other than property that was, immediately before the merger, owned by the issuing corporation [FA2] and that, on the merger, becomes property of the new corporation [FA1].” CRA stated:
[T]he shares of FA2 and FA3 would be cancelled simultaneously and, thus, FA1 would simultaneously receive property of both FA2 and FA3 on the Merger. [Thus] the property of FA3 would be received by FA1 as consideration for the shares of FA2. Since the property of FA3 would not be owned by FA2 immediately before the Merger, Paragraph N would not apply.
Neal Armstrong. Summary of 15 September 2017 External T.I. 2017-0709331E5 under s. 248(1) - disposition - para. (n).
E-Funds – Supreme Court of India indicates that the provision of ancillary services rather than direct customer services does not engage a services PE
Two American companies ran and serviced ATM networks in North America and also provided automated fraud prevention services. 40% of the worldwide staff of the group were employed by an indirect Indian subsidiary, which operated a call centre as well as providing software troubleshooting and testing services. Two key employees were U.S. employees who had been seconded to the Indian subsidiary.
Nariman J applied Formula One to state that “it is clear that there must exist a fixed place of business in India, which is at the disposal of the US companies, through which they carry on their own business” – and as that was not the case, they had no Indian PE based on a fixed place of business.
Respecting the services PE branch of the PE definition in the India-U.S. Treaty, he drew a distinction between the fact that the U.S. companies’ “customers receive services only in locations outside India” whereas “only auxiliary operations that facilitate such services are carried out in India.” Therefore, there also was no services PE in India.
Neal Armstrong. Summary of Assistant Director of Income Tax-I, New Delhi v. M/s E-Funds IT Solution Inc. Civil Appeal No. 6082 of 2015, 24 October 2017 under Treaties - Articles of Treaties - Art. 5.