The shareholders of Opco loaned it money to permit it to acquire inventory. The loans were unsecured and bore interest at 10% yearly. The Court of Quebec, in light of the Quebec equivalent of section 67 of the ITA, denied the deduction of interest in excess of 7.89% yearly, which was the bottom end of a range of reasonable rates for similar loans provided by the taxpayers’ own expert (Deloitte). Neil Armstrong summary of Gervais Auto Inc. v. Agence du revenu du Québec, 2019 QCCQ 5894.
How does the presence of a partnership in a structure affect the analysis of whether persons are related under section 251 of the Income Tax Act (Canada)?
- A partnership is not a person for the purposes of section 251
- Where a corporation controls a partnership that controls another corporation, the first corporation will be related to the other corporation.
- A partnership that controls a corporation does not deal at arm’s length with the corporation.
- A partner who controls a partnership does not deal at arm’s length with the partnership.
Jin Wen, “Partnership and the Meaning of ‘Related'” (Oct 2019) 19:4 Tax for the Owner-Manager
The federal government has allocated significant additional funds to the CRA to permit it to enforce better compliance. The CRA has targeted family trusts (among other things).
The CRA’s audit process for a trust involves accumulating documentation and information about many details related to (1) the trust’s setup and administration, including its bank statements; (2) evidence regarding the subscription of shares by the trust; (3) the payment of trust expenses; and (4) trustees’ resolutions concerning the payment of income and capital gains to beneficiaries.
The CRA seems to be particularly concerned about trusts that realize gains where the capital gain exemption might be available to beneficiaries. The CRA auditors are scrutinizing whether the shares in question were “qualified small business corporation shares” and whether the proceeds received ended up in the hands of each beneficiary who claimed the exemption for the corresponding gain. On this point, please see my comment on Laplante.
Jeanne Cheng, “The CRA’s Audit Crackdown on Family Trusts” (Oct 2019) 19:4 Tax for the Owner-Manager.
The CRA believes that taxable capital gains are “income” for the purposes of paragraph (c) of the “excluded shares” definition in the TOSI rules. The CRA also states that the gains in question should be computed on a gross basis, without deducting allowable capital losses. Dino Infanti, “Taxable Capital Gains Are Income for TOSI “Excluded Shares” Purposes” (Oct 2019) 19:4 Tax for the Owner-Manager, commenting on CRA technical interpretation 2019-0802331E5 (May 24, 2019).
Automobile benefits are fish in a smaller barrel for CRA auditors. If all else fails, the auditor can recover something for his or her time by reassessing them. (My experience on the subject is probably not representative. Nevertheless, it’s the rare reassessment I contest where some kind of benefit isn’t reassessed for a company-owned car.)
A client of mine shows us how it’s done. (I’m telling this story with his permission.) His company was subject to a desk audit for $120,000 of vehicle expenses incurred over two years. The CRA gave him 30 days to respond. He responded in 20 days—without consulting me, I might add—with 2,000 pages of materials. The result? The CRA did not adjust one penny of the expenses claimed.
He also volunteered to me that, in seventeen years of business, his company has never been late with a single remittance of health tax, WSIB (across ten provinces), HST/GST, CPP/EI or employee income tax.
In Moore v R, 2019 TCC 141 (informal procedure), the taxpayer, in filing his 2016 return, realized that he needed to file a T1135 for shares he owned of a US corporation that he had acquired under an employee stock option plan. The tax cost of his shares exceeded $100,000 for the first time in 2015. The taxpayer promptly filed the T1135. The CRA, being the CRA, dinged him for a $2,500 penalty.
The court reversed the imposition of the penalty on the basis that the taxpayer had been duly diligent.
The TCC noted that Mr. M had acted in good faith and voluntarily disclosed his late filing to the CRA.
The TCC also noted the steps that Mr.M took, including that he properly reported the benefit and all income received on the shares, paid the appropriate amount of tax, promptly filed his T1135 notification form for subsequent taxation years after learning about the requirement, notified the CRA in writing about the 2015 obligation, and filed a 2015 form T1135.
The court appears to have been influenced as well by the CRA’s deficient communication about the T1135 requirement in the 2015 T1 Guide.
Georgina Tollstam “No Late-Filing Penalty for Cautious Taxpayer” (August 2019) 27:8 Canadian Tax Highlights
In Eyeball Networks Inc. v R, 2019 TCC 150, the court held that section 160 applied to a transferee corporation (the new operating company or “TC”) that had received property from a distributing corporation (the old operating company or “DC”) as part of a related party butterfly. TC received the property at a time when DC owed income tax. The Court concluded section 160 applied to TC because “a setoff constitutes a transfer of property, and … the [DC] note had a nominal FMV [at the time of the setoff]”. Apparently, no expert evidence was called regarding the value of the notes issued by DC and TC as part of the butterfly.
The authors criticize the decision for its characterization of the legal consequences of a setoff (as constituting a transfer of property) and because a “cash cycle” (a daylight loan ) would appear to address concerns about the “nominal value” of the DC note, which implies that the concerns were misplaced to begin with.
The taxpayer has appealed the decision (A-308-19).
Ashvin R. Singh and Ryan W. Antonello, “Section 160 in a Butterfly Reorganization” (August 2019) 27:8 Canadian Tax Highlights
The CRA, in technical interpretation 2018-0776661I7 (August 8, 2019), takes the position that a Bitcoin miner receives Bitcoin as barter for services rendered. The transaction is a barter transaction because Bitcoin isn’t legal tender (see IT-490 “Barter Transactions”). The receipt occurs at the time the Bitcoin is received. The amount to be reported for income tax purposes, if the Bitcoin miner carries on business as such, is probably the value of the Bitcoin at the time of receipt. The technical interpretation states that the Bitcoin value can likely be determined more easily than the value of the services given up in exchange.
The CRA website has a “Guide for cryptocurrency users and tax professionals” here.
Clients sometimes complain to me that they have given records to a CRA auditor who then returns only some of the records or returns them in a disorganized state that makes them difficult to work with. Accordingly, if a client asks me about a CRA demand for records, I usually counsel them to provide copies or to keep copies of what is provided. This can be onerous, but the alternative is to risk losing records, if the CRA is careless with them, and then have the Tax Court blame you for it. See MacDonald v R, 2019 TCC 169 (informal procedure), in which we read the following:
 The Appellant presented himself as an executive-level businessperson who dealt primarily with telecommunications company executives. Having in mind the duties statutorily fixed upon taxpayers to retain relevant records per subsections 260(1) and (6) of the Act [sic—presumably the reference should be to section 230], set out above, I must observe that the Appellant exhibited inadequate acumen and prudence in not retaining a copy of the expense records bundle that he sent to CRA.