November 2014 issue - Canadian Tax Foundation

c a n a d i a n
t a x
Editor: Alan Macnaughton, University of Waterloo
([email protected])
Volume 4, Number 4, November 2014
Is a Future Income Tax Asset an
Asset Used in an Active Business?
The CRA’s longstanding position was that a future income tax asset was an asset for the purposes of the QSBC
and SBC definitions, but that it was not “used” in an active
business, and that the future income tax asset should be
considered an ineligible asset when one was determining
whether a share was a QSBC share or whether a company
was an SBC.
The CRA’s original position was set out in TI 20000015825 (October 2, 2000) and was based on Munich
Reinsurance Company (Canada Branch) v. The Queen (2000
CanLII 308 (TCC)), in which the TCC found that the right
to the income tax refund did not constitute property used
to carry on an insurance business in Canada. However, this
finding was overturned on appeal (2001 FCA 365): the FCA
held that the right to a refund of tax overpayments was a
right acquired in the course of carrying on a business and
that consequently the right was property held in the course
of carrying on the business.
Nevertheless, in 2008 the CRA reiterated its original
position (CRA document no. 2008-028530). The CRA
believed that the FCA decision could not be used to determine whether a future income tax asset is an asset used
principally in an active business in accordance with section
110.6. First, Munich involved an income tax refund, not a
future income tax asset; second, the analysis focused mainly
on the holding of property and not on its use. The CRA
instead based its 2008 position on Ensite Ltd. v. R (1986
CanLII 41 (SCC)), which established that the asset must be
“employed” or “risked” in the business in order to be considered an asset used in a business.
In its new 2013 position, the CRA now considers that a
future income tax asset is not an asset for the purposes of
the QSBC and SBC definitions. The CRA states that when
a future income tax asset becomes an income tax receivable,
this receivable must be considered as an asset to establish
whether a share is a QSBC share or whether a company is
an SBC, and it may be considered to be used in an active
business if the income tax receivable results from the active
carrying on of a business. The CRA provides the example
of an income tax receivable resulting from a loss carryback
from an active business.
The CRA’s change in position is favourable for taxpayers.
A corporation that qualifies as an SBC may take advantage
of certain tax benefits—in particular, the capital gains
exemption; the use of a trust or other structure to split
income with a spouse or children without triggering the
In 2013, the CRA modified its position on the qualification
of a future income tax asset as an asset used in an active
business for the purposes of the definitions of “qualified
small business corporation” (QSBC) in subsection 110.6(1)
and “small business corporation” (SBC) in subsection
248(1). (See TI 2014-0537611C6, October 11, 2013.) The
CRA now considers that a future income tax asset is not an
asset for the purposes of the QSBC and SBC definitions.
Therefore, a future income tax asset must not be taken into
account when one is determining whether a share is a QSBC
share or whether a company is an SBC.
A future income tax asset is identified as an asset on a
company’s balance sheet in accordance with the recommendations in section 3465 of the CPA Canada Handbook
on income tax accounting. It is recognized for the tax effects
that would arise if the firm’s assets were realized for their
carrying amounts.
In This Issue
Is a Future Income Tax Asset an Asset Used in an
Active Business?
1
L’actif d’impôt futur est-il un actif utilisé dans
l’exploitation active d’une entreprise?
2
CRA Reassessments: The Trap in Eliminating the
Extra Tax by a Loss Carryback
3
Partnership Interests and Form T1135: Which Party
Should File?
3
Partnership Dissolutions: The Undivided Interest
Condition4
Quebec Budget Curtails Payroll Tax Planning
Opportunity5
Le budget du Québec limite la planification relative
aux cotisations sociales
6
Filing a Notice of Objection Could Result in Increased
Assessed Tax Payable
6
SCC Ruling May Suggest PSB Risks to Partners
7
iPhone Purchases Through Straw Buyers:
ITCs Denied
8
The Substantial Presence Test for US Residence
9
Supreme Court Docket Update
10
Dossiers portés en appel devant la Cour suprême
10
©2014, Canadian Tax Foundation
fo c u s
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Pages 1 – 12
attribution rule under subsection 74.4(2); or even the
qualification of a loss that would otherwise be a capital loss
as a business investment loss. For the purpose of determining a company’s status, however, it is important to limit its
ineligible assets. Henceforth, future income tax assets in a
corporation’s financial statements will not have to be purified
because they will no longer be considered ineligible assets.
CAF 365) : la CAF a conclu que le droit d’obtenir le
remboursement de ses paiements d’impôt en trop était un
droit acquis dans le cadre de l’exploitation d’une entreprise,
et que, par conséquent, le droit était un bien détenu dans le
cadre de l’exploitation de l’entreprise.
Néanmoins, en 2008, l’ARC a réitéré sa position originale
(document no 2008-028530 de l’ARC). L’ARC était d’avis
que la décision de la CAF ne pouvait être utilisée afin de
déterminer si un actif d’impôt futur est un actif utilisé
principalement dans une entreprise exploitée activement
conformément à l’article 110.6. D’une part, la décision
Munich visait un remboursement d’impôt et non un actif
d’impôt futur, et d’autre part, l’analyse portait principalement
sur la détention du bien et non sur son utilisation.
L’ARC a plutôt basé sa position en 2008 sur l’arrêt Ensite
c. La Reine (1986 CanLII 41 (CSC)), qui a établi que l’actif
doit être « employé » ou « risqué » dans l’entreprise afin
d’être considéré comme un actif utilisé dans une entreprise.
Dans sa nouvelle position en 2013, l’ARC considère
maintenant qu’un actif d’impôt futur n’est pas un actif aux
fins des définitions d’AAPE et de SEPE. L’ARC précise que
lorsqu’un actif d’impôt futur devient un impôt à recevoir,
cet impôt doit être considéré comme un actif pour établir
si une action est une AAPE ou si une société est une SEPE,
et il pourra être considéré comme étant utilisé dans
l’exploitation active d’une entreprise si cet impôt à recevoir
découle de l’exploitation active d’une entreprise. L’ARC
donne en exemple un impôt à recevoir découlant du
report rétrospectif d’une perte provenant d’une entreprise
exploitée activement.
Le changement de position de l’ARC est favorable aux
contribuables. Une société qui est considérée comme une
SEPE peut profiter de certains avantages fiscaux,
notamment de l’exonération de gains en capital, du
recours à une fiducie ou à une autre structure pour
fractionner son revenu avec le conjoint ou les enfants sans
entraîner l’application de la règle d’attribution prévue au
paragraphe 74.4(2), ou encore de considérer une perte qui
serait autrement une perte en capital comme une perte au
titre d’un placement d’entreprise. Cependant, aux fins de
la détermination du statut d’une société, il est important
de limiter ses actifs non admissibles. Dorénavant, les actifs
d’impôts futurs présentés aux états financiers d’une société
n’auront plus à être purifiés puisqu’ils ne seront plus
considérés comme des actifs non admissibles.
Mylène Tremblay
Deloitte LLP, Quebec City
[email protected]
L’actif d’impôt futur est-il un actif
utilisé dans l’exploitation active
d’une entreprise?
En 2013, l’ARC a modifié sa position sur l’admissibilité d’un
actif d’impôt futur à titre d’actif utilisé dans l’exploitation
active d’une entreprise aux fins de la définition d’« action
admissible de petite entreprise » (AAPE) du paragraphe
110.6(1) et de la définition de « société exploitant une petite
entreprise » (SEPE) du paragraphe 248(1). (Voir IT
2014-0537611C6.) L’ARC est maintenant d’avis qu’un actif
d’impôt futur n’est pas un actif aux fins des définitions
d’AAPE et de SEPE. Par conséquent, on ne prendra pas en
compte un actif d’impôt futur pour déterminer si une
action est une AAPE ou si une société est une SEPE.
Un actif d’impôt futur correspond à un actif présenté au
bilan d’une société, conformément aux recommandations
du chapitre 3465 du Manuel de CPA Canada portant sur la
comptabilisation des impôts sur les bénéfices. On le
constate pour prendre en compte l’incidence fiscale qui
résulterait de la réalisation des actifs de la société pour leur
valeur comptable.
Selon la position de longue date de l’ARC, un actif
d’impôt futur était un actif aux fins des définitions d’AAPE
et de SEPE, mais il n’était pas « utilisé » activement dans
l’exploitation d’une entreprise et il devait être considéré
comme un actif non admissible pour déterminer si une
action était une AAPE ou si une société était une SEPE.
La position de l’ARC à l’origine était expliquée dans
l’interprétation technique IT 2000-0015825 et était fondée
sur la décision Munich Reinsurance Co. (Canada Branch) c.
La Reine (2000 CanLII 308 (CCI)) dans laquelle la CCI avait
conclu que le droit de recevoir un remboursement d’impôt
ne constituait pas un bien utilisé dans le cadre de
l’exploitation d’une entreprise d’assurance au Canada.
Toutefois, cette conclusion a été infirmée en appel (2001
Volume 4, Number 4
Mylène Tremblay
Deloitte S.E.N.C.R.L./s.r.l., Québec
[email protected]
2
November 2014
CRA Reassessments: The Trap in
Eliminating the Extra Tax by a
Loss Carryback
The taxpayer will generally be charged interest on the
outstanding balance of taxes owing for a period of 30 days
after a request is made to the minister to carry back a loss.
The taxpayer should submit this request as early as possible
in order to minimize the amount of interest that will accrue
on the balance of taxes payable.
The preceding discussion relates to the situation in which
tax is payable after the reassessment. If that is not the case,
the taxpayer is in a nil assessment situation even without a
loss carryback. To appeal the reassessment in those circumstances, the taxpayer should apply for a determination of
losses under subsection 152(1.1), in response to which an
objection may be filed.
If a taxpayer is reassessed for a previous year and taxes are
deemed to be payable, the taxpayer may want to offset that
taxable income with a loss carryback. However, unless more
than $2.00 of federal tax is left in that year after the carryback
has been applied, the taxpayer will generally relinquish the
right to challenge the reassessment. This is a consequence
of the principle that one cannot appeal a nil assessment.
In Canada v. Interior Savings Credit Union (2007 FCA
151), the court stipulated that a nil assessment cannot be
appealed, because it does not meet the inherent standard of
an assessment. The court opined that all appeals must be
directed against an assessment, and an assessment that assesses
no tax fails to meet the definition of “assessment.”
More recently, in Nottawasaga Inn Ltd. v. The Queen (2013
TCC 377), the taxpayer was unable to challenge the interest
owing when a nil tax assessment was created by a loss carryback. Presumably, the interest could have been challenged
if there had been a calculation error, but in this case the issue
was the principal owing (the amount of the reassessment).
A challenge of the principal owing was not permitted because
it amounted to appealing a nil assessment.
Fortunately, taxpayers can easily avoid the trap associated
with utilizing loss carrybacks: choose the amount of the
loss carryback so that some taxable income is left in the
reassessment year. This planning will leave open the option
of pursuing an appeal to the reassessment while still achieving the goal of using the carryback, thereby preventing
significant further interest from accruing. The amount of
federal tax left owing should be more than $2.00 so that it
will not be deemed to be nil (subsection 161.4(1)).
The trap described above can also apply in a loss carryforward situation. Suppose that a taxpayer is reassessed for
the 2013 taxation year, but the taxpayer has a non-capital
loss for the year 2012. Carrying forward the 2012 loss to
2013 and completely eliminating 2013 taxable income will
also result in the loss of appeal rights. Furthermore, the
trap is not limited to non-capital losses. Any application
of a net capital loss carryforward or carryback can create a
nil assessment if no taxable income remains.
If a taxpayer implements these recommendations in taxpreparation software, a manual override may be necessary:
the software may be set to automatically reduce taxable
income to zero through the available carryover
deductions.
Volume 4, Number 4
Alex Klyguine
Borden Ladner Gervais LLP, Toronto
[email protected]
Partnership Interests and Form
T1135: Which Party Should File?
Canadian taxpayers with an interest in a partnership that
holds specified foreign property (as defined in subsection
233.3(1)) may face uncertainty when assessing their form
T1135 (“Foreign Income Verification Statement”) filing
obligations. Depending on the partnership’s structure, either
(1) the taxpayer may be required to file form T1135 in respect of its partnership interest, or (2) the partnership may
be required to file form T1135 in respect of its property.
Section 233.3 requires a specified Canadian entity whose
total cost amount of specified foreign property exceeds
$100,000 at any time in the year to file form T1135 by the
entity’s filing-due date. A specified Canadian entity includes
a taxpayer resident in Canada and a partnership if the income attributable to non-resident partners is less than 90
percent of the total income of the partnership. A specified
foreign property includes an interest in a partnership that
holds specified foreign property, but does not include a
partnership that is a specified Canadian entity.
Assume that an individual resident in Canada owns a 5
percent interest with a cost amount exceeding $100,000 in
a partnership that holds real estate rental property in the
United States (that is, specified foreign property), and that
the partnership’s cost of real estate rental property also exceeds
$100,000. When the residence of each of the other partners
is unknown to the individual, two situations can apply:
• If the other partners are US residents, the partnership
itself should not be required to file form T1135 because
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November 2014
it will not be a specified Canadian entity. However,
the individual will be required to file form T1135 in
respect of his or her partnership interest.
• If instead another 6 percent of the partners are Canadian
residents, and the remaining 89 percent of the partners
are US residents, the partnership will be required to file
form T1135 in respect of its real estate rental property
because it will be a specified Canadian entity. The individual partners will not have to file.
cost bump) from a Canadian partnership to its partners on
the dissolution of the partnership. However, structuring
the dissolution to comply with that provision can be challenging, particularly because of the undivided interest
condition in the preamble to subsection 98(3). The undivided interest condition requires that the partnership
property be distributed to the partners such that immediately after the distribution each partner has an undivided
interest in each partnership property that, when expressed
as a percentage of all the undivided interests in that property, is equal to the partner’s undivided interest so expressed
in each other partnership property.
The undivided interest condition poses a number of
interpretive and practical questions for taxpayers.
Violations of these rules can easily occur. If a partnership
is managed by a US-resident person and the majority of the
partners are US residents, it is unlikely that the person
managing the partnership will seek Canadian tax advice.
Because the “less than 90 percent non-resident partner”
filing threshold for form T1135 is low and does not mirror
the filing requirement for partnership information returns,
it may be easy to overlook a T1135 filing obligation on the
assumption that a partnership is a “foreign partnership.”
In the absence of full information about the residence
status of other partners, the best compliance strategy for a
Canadian partner may be to protectively file form T1135
in respect of the taxpayer’s interest in the partnership.
However, a partnership’s filing obligations cannot be avoided by such a filing (nor can any related penalties for failing
to file).
Additional complexities can arise if the partnership is
formed in a foreign jurisdiction. The foreign partnership
must first be characterized for Canadian tax purposes as
either a partnership or another form of business (for example, a corporation). The CRA will compare the relevant
characteristics of the foreign partnership to recognized
forms of business under Canadian law in order to classify
the foreign partnership for Canadian tax purposes. If the
foreign partnership is classified as a corporation for Canadian tax purposes, other foreign reporting requirements,
such as form T1134 (“Information Return Relating to
Controlled and Not-Controlled Foreign Affiliates”), may
be required.
• What is an undivided interest? The term “undivided
interest” is not defined in the Act; it is generally understood to refer to circumstances of co-ownership under
the relevant common or civil law (see, for example,
CRA document no. 2001-0072595, March 21, 2001,
in the context of subsection 248(21)). In common-law
jurisdictions, for example, a person who owns a parcel
of land as a tenant in common with another person is
generally considered to have an undivided percentage
interest in the entire parcel, not an interest in half the
parcel. The same principles of co-ownership should apply
to identical properties, such as securities, held by the
partnership (see, for example, “Revenue Canada Round
Table” in the 1984 Conference Report, question 89).
• Does the condition apply to all property of the partnership? On first reading, the condition appears to apply
to any right or thing held by the partnership, because
the term “property” is very broadly defined in subsection
248(1) to mean “property of any kind whatever . . .
[and] unless a contrary intention is evident, money.”
In my view, paragraph 98(3)(a) provides a “contrary
intention”: it clearly distinguishes between money and
“partnership property” distributed to the partners;
therefore, money distributed by the partnership should
not be subject to the undivided interest condition.
Informal discussions with the CRA suggest that it may
share this view.
• In what proportions should the property be distributed
to the partners? The Act does not provide specific
guidance on this point. It is clear that each partner’s
undivided percentage interest in a particular partnership property must be equal to the partner’s undivided
percentage interest in every other partnership property;
however, it is not clear what that percentage should
Jacqueline Huang
MNP LLP, Toronto
[email protected]
Partnership Dissolutions: The
Undivided Interest Condition
Subsection 98(3) is commonly relied on to provide a taxdeferred distribution of property (and, in certain cases, a
Volume 4, Number 4
4
November 2014
be. Many tax practitioners accept that each partner’s
percentage should be equal to its pro rata percentage
interest in the partnership immediately before the
dissolution of the partnership (although the calculation
of such an interest is not always obvious, particularly
when the partners have different classes of interests or
priorities). The CRA stated in Interpretation Bulletin
IT-471R, “Merger of Partnerships,” at paragraph 2,
that the apportionment of the undivided percentage
interests among the partners must merely be “reasonable in the circumstances.”
allocated, granted, or awarded to the employee due to, or
in the course of, his or her office or employment by a person not at arm’s length with the employer. Legislation to
implement the budget has not yet been released, but it is
understood that some transactions entered into before
budget day (June 4, 2014) will be affected.
Consider an example similar to the facts in Pratt & Whitney.
Assume that a non-resident corporation grants stock options
from its capital stock to employees of its subsidiary, which
has a permanent establishment in Quebec. The subsidiary
does not reimburse the parent company for the benefits
conferred on its employees. Under the budget proposal, a
Quebec employer will now have to make employer contributions on the value of stock option benefits conferred by the
parent company (regardless of which party assumes the cost).
The rules for Quebec income tax withholding differ from
the rules for employer contributions. In the example, the
non-resident parent company, as the “payer,” is responsible
for withholding under section 1015 of the Taxation Act.
However, Revenu Québec’s current administrative position
is that such withholding is not required if the employee
does not report for work at any establishment of the payer
in Quebec and is paid by a permanent establishment of the
payer outside Quebec (see document 03-010730 and IMP.
1015-1/R1). Therefore, neither the parent nor the subsidiary is required to withhold. (Of course, this tax will be paid
via the employee’s personal income tax return.)
When the legislative amendments arising out of the
budget are tabled, Revenu Québec may revise its administrative position in order to clarify the obligations of both
the payer and the employer regarding income tax withholding and the production of a Relevé 1.
A further complication is that the rules for federal income
tax are different from both of the above tax compliance
regimes. According to TI 2006-0217731E5 (June 7, 2007),
the payer must declare the value of the stock option benefit
on form T4 and withhold the appropriate amount. Therefore, if the Canadian subsidiary does not partially or fully
reimburse the non-resident parent company for the benefit,
the parent company is responsible for making the withholding and producing form T4. On the other hand, if
reimbursement does take place, the subsidiary, as the
“payer,” is responsible.
In my view, it is not entirely clear that subsection 98(3)
contains an implicit requirement that the apportionment
of undivided interests be pro rata or reasonable. That said,
one might expect that arm’s-length partners would generally
agree to a pro rata distribution and that such agreement
would generally be considered reasonable. However, given
that partnership property does not include money, subsection 98(3) may in fact be more flexible than some would
initially expect—for example, it may be possible for a
partner to receive a smaller undivided percentage interest
in the non-money partnership property in favour of a larger
distribution of money.
Kim Maguire
Borden Ladner Gervais LLP, Vancouver
[email protected]
Quebec Budget Curtails Payroll
Tax Planning Opportunity
The 2014 Quebec budget ended the opportunity implicitly
validated by Pratt & Whitney Canada Cie c. Agence du revenu
du Québec (2013 QCCA 706), in which certain payroll taxes
on stock options could be avoided by having stock options
issued by a company that has no establishments in Quebec
(“QCCA Opens Door to Planning To Avoid Quebec Payroll
Taxes,” Canadian Tax Focus, August 2013). However, the
proposed corrective amendments create some complexity
because of the difference between the base for Quebec
payroll taxes and the rules for Quebec and federal income
tax withholding.
The budget proposes to amend the definition of “base
wages” under section 1159.1 of the Quebec Taxation Act,
which serves as the starting point for calculating employer
contributions (that is, payroll taxes) required under various
Quebec laws. Specifically, this definition will be broadened
so that the employer will have to consider any amount paid,
Volume 4, Number 4
Marilyne D’Amours and Caroline Bacon
PricewaterhouseCoopers LLP, Quebec City
[email protected]
[email protected]
5
November 2014
Le budget du Québec limite
la planification relative aux
cotisations sociales
présente pas au travail à un établissement du payeur au
Québec et qu’il est payé par un établissement stable du
payeur à l’extérieur du Québec (voir le document
03-010730 et l’IMP. 1015-1/R1). Par conséquent, ni la
société mère ni la filiale n’est tenue de faire les retenues.
(Naturellement, cet impôt sera payé dans la déclaration de
revenus personnelle de l’employé.)
Lorsque les modifications législatives découlant du
budget seront déposées, Revenu Québec pourrait revoir
sa position administrative afin de clarifier les obligations
du payeur et de l’employeur concernant les retenues
d’impôt et la production du Relevé 1.
Pour ajouter à la complexité, les règles fédérales
relatives à l’impôt sur le revenu sont différentes de celles
mentionnées ci-dessus. Selon l’IT 2006-0217731E5
(7 juin 2007), le payeur doit déclarer la valeur de
l’avantage lié aux options d’achat d’actions sur le
formulaire T4 et retenir le montant approprié. Par
conséquent, si la filiale canadienne ne rembourse pas
partiellement ou entièrement la société mère non
résidente pour l’avantage, celle-ci est responsable de faire
les retenues et de produire le formulaire T4. Par ailleurs,
si un remboursement est effectué, la filiale, à titre de
« payeur », est responsable de ces obligations.
Le budget de 2014 du Québec a mis fin à la possibilité
implicitement validée par la décision Pratt & Whitney
Canada Cie c. Agence du revenu du Québec (2013 QCCA
706), d’éviter de payer certaines cotisations sociales sur
des options d’achat d’actions mettant ces dernières par
une société qui n’a pas d’établissement stable au Québec
(« QCCA Opens Door to Planning To Avoid Quebec
Payroll Taxes », Canadian Tax Focus, août 2013).
Cependant, les modifications correctives proposées sont
source de complexité en raison des disparités entre les
obligations du payeur et de l’employeur eu égard aux
cotisations sociales du Québec et les règles sur les retenues
d’impôt du Québec et du fédéral.
Le budget propose de modifier la définition de « salaire
de base » de l’article 1159.1 de la Loi sur les impôts du
Québec qui sert de point de départ au calcul des cotisations
de l’employeur (c’est-à-dire les cotisations sociales) exigées
en vertu de diverses lois du Québec. Précisément, cette
définition sera élargie de sorte que l’employeur devra
prendre en compte tout montant versé, alloué, conféré ou
payé à un employé en raison de sa charge ou de son emploi
par une personne qui a un lien de dépendance avec
l’employeur. La législation mettant en oeuvre le budget n’a
pas encore été rendue publique, mais il est entendu que
certaines transactions conclues avant le jour du budget
(le 4 juin 2014) seront affectées.
Considérons un exemple semblable aux faits dans Pratt
& Whitney. Supposons qu’une société non résidente
octroie des options d’achat d’actions de son
capital-actions aux employés de sa filiale, qui a un
établissement stable au Québec. La filiale ne rembourse
pas la société mère pour les avantages accordés à ses
employés. En vertu de la proposition budgétaire, un
employeur du Québec devra maintenant faire des
cotisations sur la valeur des avantages liés aux options
d’achat d’actions accordées par la société mère
(indépendamment de la partie qui en assume le coût).
Les règles sur les retenues d’impôt du Québec diffèrent
des règles sur les cotisations de l’employeur. Dans
l’exemple, la société mère non résidente, à titre de
« payeur », est responsable des retenues en vertu de l’article
1015 de la Loi sur les impôts du Québec. Cependant, la
position administrative actuelle de Revenu Québec est que
de telles retenues ne sont pas requises si l’employé ne se
Volume 4, Number 4
Marilyne D’Amours et Caroline Bacon
PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., Québec
[email protected]
[email protected]
Filing a Notice of Objection Could
Result in Increased Assessed Tax
Payable
Should clients be advised that there is little risk to filing a
notice of objection because they cannot do worse than the
amount of tax payable on the CRA reassessment? Advisers
should be cautious about providing such advice to clients:
the CRA Appeals Manual identifies several situations where
“upwards adjustments” are possible. Most of these situations
relate to new information coming to light as further CRA
attention is given to the taxpayer. In addition, the decision
of the FCA in Petro-Canada (2004 FCA 158) supports
upward adjustments by the CRA so long as the adjustment
is accomplished through a new reassessment within the
applicable limitation period.
Section 4.22 of the CRA Appeals Manual 2013-09 (redacted version available through the CCH and Carswell tax
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November 2014
services) sets out the circumstances in which a CRA appeals
officer has the ability to resolve an appeal by increasing a
disputed reassessment or decreasing a downward reassessment. Three examples are given:
943372 Ontario Inc. v. The Queen, 2007 TCC 294; and
The Queen v. Geoffrey Last, 2014 FCA 129).
On the other hand, the CRA’s argument in favour of the
validity of an upward adjustment would likely be that the
adjustment is a matter of administrative law and completely
separate from the legislatively sanctioned judicial process.
The administrative-law argument suggests that the minister
would be given a wide berth in devising internal procedures
to be followed. Further, according to this argument, even
if a taxpayer had a “legitimate expectation” that the CRA
would not assess a higher amount, that expectation cannot
bind CRA Appeals on the correct (legal) application of the
statute to the taxpayer’s facts.
• An objection was received in respect of a portion of a
moving expense that had been disallowed. The review
of the file showed that the objector had moved to a
new residence in Canada from a former residence in
the United States. Therefore, the entire moving expense
(not just the portion at issue on objection) was ineligible and would be disallowed.
• An individual’s return was reassessed to disallow a
business loss claimed on the basis that there was no
reasonable expectation of profit. At the objection stage,
the objector provided new documentation, which
included sales receipts that were not included in the
taxpayer’s gross income. As a result of these sales receipts, the loss would be converted to a net profit from
business.
• The processor of a reassessment failed to follow the
instructions of the auditor to add subsection 163(2)
penalties; this was not discovered until after a notice
of objection had been filed.
Amanda Doucette
Stevenson Hood Thornton Beaubier LLP, Saskatoon
[email protected]
SCC Ruling May Suggest PSB Risks
to Partners
Determining whether a partner is an employee of a partnership of which he or she is a member is important for a
number of reasons, including whether the partner could
be found to be operating a personal services business (PSB)
as defined under subsection 125(7). Comments made by
the SCC in McCormick v. Fasken Martineau DuMoulin LLP
(2014 SCC 39) suggest a rethinking of older income tax
jurisprudence that deals with whether a partner can be an
employee.
The principal issue in McCormick was whether an equity
partner of Faskens was an employee for the purposes of the
British Columbia Human Rights Code (HRC). Mr. McCormick argued that the provision in Faskens’ partnership
agreement that forced partners to retire at the age of 65
constituted age discrimination under the HRC.
Mr. McCormick found early success with his case at the
BC Human Rights Tribunal (2010 BCHRT 347) and the
BCSC (2011 BCSC 713). He was less successful at both the
BCCA (2012 BCCA 313) and the SCC, although for somewhat different reasons. The BCCA found that it was a “legal
impossibility” for a partner to be an employee of a partnership of which he was a member.
Ultimately, although the SCC acknowledged that the
conventional view was that a partner could not be an employee of a partnership of which he was a member, the
court found that there were instances in which it could
conceivably be possible. Unfortunately for Mr. McCormick,
his position as an equity partner was one of these instances
Case law establishes the validity of an upward adjustment
(or any other adjustment) made within the applicable reassessment period through the issuance of a new reassessment (Petro-Canada, 2004 FCA 158). The new reassessment
would nullify the previous reassessment and any notice of
objection filed against it (and therefore the notice of objection would have to be refiled). However, the validity of an
upward adjustment within this period that results from the
CRA’s internal appeals process has not yet been adjudicated
by a court.
One argument against validity in the internal appeals
situation is the well-known principle that the minister is
not permitted to “appeal” its own reassessment to the TCC
(Harris, [1964] CTC 562 (Ex. Ct.)). Although this principle
was established in the context of appeals to the courts, it
might be thought to carry some weight in preventing the
CRA from taking a similar action through its internal appeals
process. This principle is likely to be of particular value in
preventing such upward adjustments beyond the normal
reassessment period. In particular, Klemen (2014 TCC 244)
held that reassessments outside of the normal reassessment
period and through the internal appeal process cannot
increase the taxpayer’s tax payable unless the subsection
152(4) circumstances (misrepresentation or fraud) apply (see
also The Queen v. Anchor Pointe Energy, 2003 FCA 294;
Volume 4, Number 4
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November 2014
and, as a result, he was found not to be an employee of
Faskens for the purposes of the HRC.
The SCC advocated taking a substance-over-form approach in evaluating the relevant factors of control and
dependency, and implicitly gave little weight to the contractually expressed intention of the parties. The SCC found
that when the working conditions and financial benefits of
a partner are controlled by another party and the substance
of the relationship is that of subordination or dependency,
those facts could suggest that the partner is in fact an
employee.
The suggestion that a contractual relationship between
partners can be disregarded for the purposes of human
rights legislation prompts an inquiry into the resulting
implications in other contexts—for example, the application of the PSB regime.
A PSB can generally be thought of as a relationship that
would be an employment relationship but for the interposition of a corporation. If a PSB is found to exist, there can
be significant negative income tax implications. Older case
law, such as Crestglen Investments Ltd. v. MNR ([1993] 2
CTC 3210 (TCC)), suggested that a PSB could not be found
in the partnership context because it is a legal impossibility
for a partner to be an employee. This reasoning suggests
that the partnership structure could in and of itself protect
against a finding that someone was an incorporated employee for PSB purposes. McCormick suggests otherwise.
McCormick can be viewed as supporting a line of cases,
including Gomex Consulting Ltd. v. The Queen (2013 TCC
135), that have found that contractual relations between
parties can be ignored for PSB purposes because the PSB
regime is an anti-avoidance provision.
A contrary argument relies on the SCC’s statement that
existing jurisprudence gives the HRC an expansive interpretation because of its quasi-constitutional nature and its
broad public purpose. Accordingly, perhaps the SCC’s
comments in McCormick should not apply to the Act,
including for PSB purposes.
the planned country-by-country releases of Apple iPhones
in 2010-11. The principal of the two firms circumvented
Apple’s product release controls by arranging batches of
“micro-managed purchases of product” in Canada followed
by export for resale to Hong Kong. The appellants engaged
a group of “initial buyers” to acquire one or two iPhones
a day from Apple Stores in Canada, for which the initial
buyers were reimbursed and were paid a fee.
The case arose because the CRA disallowed the firms’
claims for input tax credits (ITCs) under the Excise Tax Act.
The minister argued that the appellants did not incur the
HST on the initial purchases as buyers and that no agency
relationship existed to allow them to claim the ITCs on the
initial buyers’ purchases. Bocock J framed the issue as the
ability of the “agent” to affect the principal’s legal relationships with third parties.
Bocock J noted that the seller, Apple, expressly prohibited
sales of iPhones for resale or export. Had the “alleged agency”
been disclosed, Apple would have refused to make the sales
to the initial buyers. Alternatively, if and when the agency
became apparent, Apple would have invalidated the sales and
any warranty or other obligations owed to the purchasers.
Bocock J stated that concealed agency, used to “dupe”
Apple into selling to the initial buyers, could not be used
after the fact to insert a different would-be principal in
order to obtain ITCs. As Bocock J explained, the undisclosed
agency, the fact that Apple intended to contract exclusively
with an initial Canadian buyer, the absolute prohibition
against resale, the buyers’ inability to bind the appellants
because of that prohibition, and the fact that the initial
buyers’ money was used to acquire the goods undermined
the basic foundation of agency.
Though these facts were sufficient to dispose of the appeals, Bocock J added that the requisite information to
support the ITC claims was “simply fictitious, unreliable or
missing,” meaning that it was factually impossible for the
court to determine which transactions properly supported
the claimed ITCs.
With respect, perhaps the TCC should have disposed of
the appeals on this latter ground. One problem is that the
court did not take up the well-established concept of undisclosed agency—that is, a situation in which the third
party has no knowledge that it is dealing with an agent.
This would not necessarily preclude a third party such as
Apple from insisting that any buyers must purchase on
their own account, but it is difficult to see how the undisclosed nature of the relationship vis-à-vis the third party
means in and of itself that the buyers could not be serving
in the capacity of agents.
Sanjaya Ranasinghe
Felesky Flynn LLP, Edmonton
[email protected]
iPhone Purchases Through Straw
Buyers: ITCs Denied
In 2253787 Ontario Inc. (2014 TCC 121; informal procedure), the appellants were two companies that had been
set up to engage in what the TCC described as “leapfrogging”
Volume 4, Number 4
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November 2014
A more interesting discussion would relate to the proposition that the purposes of the agency must themselves be
lawful. Thus, an ostensible agency relationship established
to export technology in violation of the exporting country’s
laws might pose difficulty. As a general matter, however,
there is no principled reason why a principal cannot give
an agent authority to act illegally. This is not to say, of
course, that the principal would be able to enforce an agreement reached with the third party in violation of its terms.
There is a difference, then, between the illegality of the
subject of the transaction itself (as between the third party
and the agent) and the illegality of the contract of agency
(as between the principal and the agent).
It is not normally legally problematic (though it is socially
controversial) for a principal to rely on an agent to hold a
place in a queue (and then to make the purchase) while
awaiting the release of a desirable product. The point is
that the seller, even Apple, will not necessarily have difficulty
with someone other than the true buyer being the initial
purchaser or the ultimate consumer. If there was true agency,
Apple’s prohibition on resale would be moot because there
would be no such resale (between the initial buyers and the
appellants). Apple does not bar agency purchases; it appears
to bar purchases for reselling.
It is also unclear why Apple’s bar on a subsequent resale
or export by the appellants would render their initial purchases invalid: the focus would be more usefully placed on
the prior transaction between Apple and the initial buyers.
The issue in establishing agency is not the efficacy of the
legal rights acquired by the principal vis-à-vis the third
party (particularly on account of the principal’s noncompliance with the terms underlying the grant of those
rights), but rather the ability of the agent to affect the
principal’s legal relations with the third party.
Finally, it is unclear why the decision gives weight to the
fact that the initial buyers used their own money to acquire
the iPhones from Apple. In standard agency law, such a
purchase, if reimbursed, does not undermine the notion
that the true purchaser is the principal rather than the agent.
bank accounts and financial assets. One common way for
an individual to become a US resident for tax purposes is
through the “substantial presence” test. Fortunately, there
are several exceptions to the test—but being present in the
United States for less than 183 days in any calendar year is
not generally enough, contrary to the belief of many.
Under the substantial presence test, an individual is
considered a US resident if he or she is physically present
in the United States for at least
1) 31 days during the current year, and
2) 183 days during the three-year period that includes
the current year and the two years immediately before
that, counting
a) number of days present in the current year,
b) one-third of the days present in the first year
before the current year, and
c) one-sixth of the days present in the second year
before the current year.
The first exception, which is implicit in the rule itself,
is based on limiting the number of days of physical presence
in the United States. Thus, an individual who is present in
the United States for 150 days of each year is a US resident
under this test, because the number of days calculated in
the formula is 225 (150 + (1⁄ 3) × 150 + (1⁄6) × 150).
Conversely, a person who is present in the United States
for 120 days of each year is not considered a US resident
pursuant to the test, because the number of days is 180
(120 + (1⁄ 3) × 120 + (1⁄6) × 120). However, it is risky for
an individual to come this close to having the test apply,
since many people forget to include travel days and vacation
days in the calculation. As of June 30, 2014, days spent in
the United States are tracked more accurately through a
new automatic system at border crossings. Individuals can
access their number-of-days data on a US government
website (www.cbp.gov/I94).
The submission of form 8840, “Closer Connection
Exception Statement for Aliens,” to the IRS may be an
option to avoid certain US filing requirements if an individual may otherwise be a US resident pursuant to the
substantial presence test. By filing this form, the individual
confirms that he or she has closer personal, social, and
economic ties to Canada than to the United States, and he
or she may not need to file a US tax return. The filing
deadline is April 15 or June 15 of the year following the
tax year-end date, depending on the individual’s situation.
An individual who is present in the United States for 183
days or more in the current year cannot file form 8840.
An individual who spends 183 days or more in the United
States may be able to rely on the Canada-US treaty’s tie-
Brian M. Studniberg
Couzin Taylor LLP, Toronto
[email protected]
The Substantial Presence Test for
US Residence
Generally, a US-resident individual has many annual compliance obligations, including the filing of US tax returns
and, subject to certain thresholds, the disclosure of non-US
Volume 4, Number 4
9
November 2014
Leave Sought by the Department of Justice
breaker rules to avoid being considered a US resident. The
individual must complete form 8833, “Treaty-Based Return
Position Disclosure Under Section 6114 or 7701(b)” and
file it with the completed form 1040NR (“U.S. Nonresident
Alien Income Tax Return”). Form 8833 is also due on April
15 or June 15, depending on the individual’s situation.
Note that the difference between form 8833 and form 8840
is that the latter does not require an accompanying US
income tax return.
One other exception to the substantial presence test
should be considered: an exempt individual is allowed to
exclude days of presence in the United States on which he
or she was a foreign government-related individual, a
teacher or trainee, a student, or a professional athlete competing in a charitable sports event. Days of presence are
also excluded for someone whose medical condition prevented him or her from leaving the United States; form
8843, “Statement for Exempt Individuals and Individuals
with a Medical Condition,” must be filed with or without
the US non-resident tax return by April 15 or June 15,
depending on the individual’s situation.
Keep in mind that many other circumstances—for example, the ownership of a US rental property (whether it
is rented on a part-time or a full-time basis), investment in
a US corporation, and investment in a US partnership—can
trigger the requirement for US tax filings.
• Procureur général du Canada, et al. v. Chambre des
notaires du Québec, et al. (from 2014 QCCA 552). Leave
sought on May 20, 2014.
• The Queen v. Geoffrey Last (from 2014 FCA 129). Leave
sought on August 14, 2014.
Leave Sought by the Taxpayer
• London Life Insurance Company v. The Queen (from
2014 FCA 106). Leave sought on June 30, 2014.
• Jack Klundert v. The Queen (from 2014 FCA 156).
Leave sought on August 6, 2014.
• Burg Properties Ltd. v. The Queen (from 2014 FCA 154).
Leave sought on September 8, 2014.
Leave Denied
• Roger Couture et al. v. The Queen (from 2014 FCA 35).
Leave denied with costs on October 23, 2014. A short
summary of the case is available here.
• Neville v. National Foundation for Christian Leadership
(from 2014 BCCA 38). Leave denied with costs on May
29, 2014. A short summary of the case is available here.
• Kathryn Kossow v. The Queen (from 2013 FCA 283).
Leave denied with costs on May 15, 2014. A short
summary of the case is available here.
• TransAlta Corporation v. The Queen (from 2013 FCA
285). Leave denied with costs on May 29, 2014. A
short summary of the case is available here.
• Denis Bordeleau v. Attorney General of Canada (from
2014 QCCA 465). Leave denied with costs on September
4, 2014. A short summary of the case is available here.
• Rita Congiu et al. v. The Queen and Rita Congiu v. Agence
du revenu du Québec (from 2014 FCA 73 and 2014
QCCA 242). Leave denied with costs on September 4,
2014. A short summary of the case is available here.
• Groupe Hexagone, SEC (formerly Louisbourg SBC, société
en commandite) v. The Queen (from 2014 FCA 78).
Leave denied with costs on October 16, 2014. A short
summary of the case is available here.
Leona Liu
Ernst & Young LLP, Ottawa
[email protected]
Supreme Court Docket Update
Leave Granted
• Guindon v. The Queen. Leave to appeal from Guindon
v. The Queen (2013 FCA 153) granted with costs. The
appeal is scheduled to be heard on December 5, 2014.
This decision pertains to the nature of adviser penalties
under section 163.2. A short summary of the case is
available here.
• Minister of National Revenue v. Duncan Thompson.
Leave to appeal from Thompson v. Canada (National
Revenue) (2013 FCA 197) granted in early 2014. The
appeal is scheduled to be heard on December 4, 2014.
This decision pertains to the issue of whether a lawyer
subject to enforcement proceedings can claim solicitorclient privilege over his accounts receivable. A short
summary of the case is available here.
Volume 4, Number 4
Any mistakes or omissions are my responsibility.
Marie-France Dompierre
Department of Justice, Montreal
[email protected]
10
November 2014
Dossiers portés en appel devant
la Cour suprême
• Kathryn Kossow c. Sa Majesté la Reine (de 2013 CAF
283). Demande d’autorisation d’appel rejetée avec
dépens le 15 mai 2014. Un court sommaire est
disponible ici.
• TransAlta Corporation c. Sa Majesté la Reine (de 2013
CAF 285. Demande d’autorisation rejetée avec
dépens le 29 mai 2014. Un court sommaire est
disponible ici.
• Denis Bordeleau c. Procureur général du Canada (de
2014 QCCA 465). Demande d’autorisation rejetée
avec dépens le 4 septembre 2014. Un court
sommaire est disponible ici.
• Rita Congiu et al. c. Sa Majesté la Reine et Rita
Congiu et al. c. Agence du revenu du Québec (de 2014
CAF 73 et 2014 CAQ 242. Demande d’autorisation
rejetée avec dépens le 4 septembre 2014. Un court
sommaire est disponible ici.
• Groupe Hexagone, S.E.C. (anciennement Louisbourg
SBC, société en commandite) c. Sa Majesté la Reine (de
2014 CAF 78); demande d’autorisation rejetée avec
dépens le 16 octobre 2014. Un court sommaire est
disponible ici.
Demande d’autorisation d’appel accueillie
• Guindon c. La Reine. Demande d’autorisation
d’appel de l’arrêt Canada c. Guindon (2013 CAF 153)
est accueillie avec dépens. L’appel doit être entendu
le 5 décembre 2014. Cet arrêt se rapporte à la nature
de la pénalité imposée à un tiers en vertu de l’article
163.2. Un court sommaire de l’arrêt est disponible ici.
• Ministre du Revenu national c. Duncan Thompson.
Demande d’autorisation d’appel de l’arrêt Thompson
c. Canada (Revenu national) (2013 CAF 197)
accueillie au début de 2014. L’appel doit être
entendu le 4 décembre 2014. Cet arrêt se rapporte à
la question de savoir si un avocat qui est visé par des
procédures d’exécution peut invoquer le secret
professionnel de l’avocat à l’égard de ses créances.
Un court sommaire de l’arrêt est disponible ici.
Demande d’autorisation déposée par
le ministère de la Justice
Toute erreur ou omission relèvent de ma
responsabilité.
• Procureur général du Canada, et al. c. Chambre des
notaires du Québec, et al. (de 2014 QCCA 552).
Demande d’autorisation déposée le 20 mai 2014.
• La Reine c. Geoffrey Last (de 2014 CAF 129).
Demande d’autorisation déposée le 14 août 2014.
Marie-France Dompierre
Ministère de la Justice, Montréal
[email protected]
Demande d’autorisation déposée par
le contribuable
• London Life, compagnie d’assurance-vie c. Sa Majesté
la Reine (de 2014 CAF 106). Demande
d’autorisation déposée le 30 juin 2014.
• Jack Klundert v. Sa Majesté la Reine (de 2014 CAF
156). Demande d’autorisation déposée le 6 août 2014.
• Burg Properties c. la Reine (de 2014 CAF 154). Demande
d’autorisation déposée le 8 septembre 2014.
Demande d’autorisation rejetée
• Roger Couture et al. c. Sa Majesté la Reine (de 2014
CAF 35). Demande d’autorisation rejetée avec
dépens le 23 octobre 2014. Un court sommaire de
l’arrêt est disponible ici.
• Ken Neville, et al. c. National Foundation for Christian
Leadership (de 2014 BCCA 38). Demande
d’autorisation rejetée avec dépens le 29 mai 2014.
Un court sommaire de l’arrêt est disponible ici.
Volume 4, Number 4
11
November 2014
Potential authors are encouraged to send ideas or original submissions to the
editor of Canadian Tax Focus, Alan Macnaughton ([email protected]),
or to one of the contributing editors listed below. Content must not have been
published or submitted elsewhere. Before submitting material to Canadian Tax
Focus, authors should ensure that their firms’ applicable review policies and
requirements for articles bearing the firm’s name have been met.
For each issue, contributing editors from Young Practitioners chapters across
Canada suggest topics and assist authors in developing ideas for publication.
For the November 2014 issue, we thank Timothy Fitzsimmons, editorial adviser, and the following contributing editors:
Halifax:
•Sean Glover ([email protected])
•Dawn Haley ([email protected])
Quebec City:
•Amélie Guimont ([email protected])
Montreal:
•Stephanie Jean ([email protected])
•Alexandre Laturaze ([email protected])
Ottawa:
•Mark Dumalski ([email protected])
Toronto:
•Nicole K. D’Aoust ([email protected])
•Melanie Kneis ([email protected])
Winnipeg:
•Greg Huzel ([email protected])
•Sheryl Troup ([email protected])
Edmonton:
•Tim Kirby ([email protected])
Calgary:
•Jean-Philippe Couture ([email protected])
•Bernice Wong ([email protected])
Vancouver:
•Trevor Goetz ([email protected])
•Matthew Turnell ([email protected])
Copyright © 2014 Canadian Tax Foundation. All rights reserved. Permission to reproduce or
to copy, in any form or by any means, any part of this publication for distribution must be
obtained in writing from Michael Gaughan, Permissions Editor, Canadian Tax Foundation,
Suite 1200, 595 Bay Street, Toronto, ON M5G 2N5. E-mail [email protected].
In publishing Canadian Tax Focus, the Canadian Tax Foundation and Alan Macnaughton are
not engaged in rendering any professional service or advice. The comments presented herein
represent the opinions of the individual writers and are not necessarily endorsed by the Canadian
Tax Foundation or its members. Readers are urged to consult their professional advisers before
taking any action on the basis of information in this publication.
ISSN 1925-6817 (Online). Published quarterly.
Volume 4, Number 4
12
November 2014