Manu Kakkar, Alex Ghani and Boris Volvofsky, in “Corporate Attribution: Refreeze May Cause Unsolvable Corporate Attribution Problem” 18:3 Tax for the Owner-Manager (July, 2018), argue that a refreeze at a lower value does not reduce the outstanding amount for the purposes of section 74.4 of the Income Tax Act (Canada). As a result, if the re-freeze shares are later redeemed, there is a “phantom” outstanding amount on which a 74.4 deemed income amount must be calculated. The corporate issuer, however, can no longer pay dividends to the freezor to reduce or eliminate the deemed income.
In Semenov v R, 2018 TCC 58, the CRA found unexplained deposits in the individual taxpayer’s personal bank account. The CRA applied a “deeming” rule to treat the amounts as unreported income subject to gross negligence penalties. The CRA applied another “deeming” rule to treat the income as unreported income of Opco for the purposes of gross negligence penalties (the individual was the sole shareholder of Opco and supposedly had no other source of income).
The Tax Court held that the CRA, while it could use assumptions to justify including an amount in a taxpayer’s income, could not use deeming rules or assumptions for the purposes of justifying gross negligence penalties.
See summary and comments by Robin MacKnight in “Facts, Not Assumptions: Penalty Relief for Taxpayers?” 18:3 Tax for the Owner-Manager (July, 2018).
In Ritchie v R, 2018 TCC 113, the taxpayer owned land that he rented to a corporation he owned. The corporation carried on a farming business. Enbridge paid amounts to the taxpayer for easements across his land, including $255,790 as an “early signing bonus” (a bonus for signing the easement agreement before a certain date). The taxpayer reported the bonus as a capital gain. The CRA reassessed to include the full amount of the bonus in the taxpayer’s income. Was the bonus on capital account? Continue reading
S 244(15) of the Income Tax Act (Canada) provides that an assessment is deemed to have been made on the date that it is sent, and the date on which an assessment is sent by first class mail “or its equivalent” is deemed to be the date on which it is received by the recipient (per s 248(7)(a)). These are deeming rules that create legal fictions that are not subject to rebuttal. For example, where the CRA can prove that it sent a notice of confirmation to the taxpayer’s correct address on a particular date, the limitation period for filing an appeal starts to run on that date, even if the taxpayer never receives the notice (because, say, the taxpayer says it was sent to the wrong address). See Charendoff v R, 2005 TCC 300,  3 CTC 2200, 59 DTC 742.
What is the date of mailing for the purposes of the foregoing rules? S 244(14) provides that an assessment or confirmation is presumed to be sent on the date shown on the notice. Where the taxpayer can provide evidence that the date on the notice was not the date of mailing, then ordinarily the CRA will be required to provide evidence to confirm the date of mailing. The CRA usually does this via an affidavit or other evidence of its mail room procedures per the so-called “mail room cases”. For an example of this mode of proof, see Barrington Lane Developments Limited v R, 2010 TCC 388, at para 8:
 The evidence of the Respondent, who called two Canada Revenue Agency (“CRA”) employees of the Winnipeg Manitoba Printing and Mail site to testify, was that there are only two printing and mail sites serving Canada, one of which is based in Winnipeg, Manitoba, and the other in Summerside, Prince Edward Island. The process for mailing notices was described as follows: one of the two sites is selected by CRA’s Ottawa headquarters and instructions are sent electronically to one of the sites. Once instructions are received, the notices of assessment or reassessment are printed on site and transferred to a production control desk where the notices are folded and inserted manually into a pre-printed registered mail envelope with the name and address of the taxpayer. The registered mail envelopes are then scanned to create a log of registered mail, setting out the date of shipping, tracking number, the name of the taxpayer and a cycle number referencing the batch of notices which were initially electronically downloaded as a group. Each notice page sent to a taxpayer contains a sequential number which can be cross-referenced to the cycle number as well. The envelopes are then deposited into a Canada Post container located on site and picked up by Canada Post with a statement of mailing printed by CRA showing the date of mailing and payment therefore, a copy of which is given to Canada Post.
 With respect to this particular notice of reassessment, the testimony of the CRA witnesses was that instructions from Ottawa to print out the batch which contained the notice of reassessment, described as cycle No. 2644, were received January 10, 2008 and the registered mail envelopes were scanned on January 14, 2008, containing as indicated the same cycle number, date of shipping, tracking number and name of the taxpayer.
I am aware of a case where the taxpayer was assessed initially for a taxation year on May 1 of the following year. Three years later, the CRA sent a reassessment dated April 28. The CRA accepted that it was only entitled to reassess the taxpayer within the normal reassessment period, which meant that, going by the date on the reassessment, the CRA had issued the reassessment in time. The envelope containing the reassessment, however, was postmarked May 2, which was one day after the expiry of the normal reassessment period.
On appeal, the taxpayer pleaded that the CRA had not reassessed in a timely manner based on the evidence provided by the envelope in which the reassessment had arrived. Justice, on behalf of the CRA, eventually conceded that it could not provide adequate mail room evidence of the date on which the reassessment was sent and agreed to allow the appeal because the envelope constituted the best evidence of the date the reassessment was sent. The reassessment that was reversed had denied a rather large deduction the taxpayer had claimed, and so the envelope effectively ended up being worth tens of thousands of dollars to the taxpayer.
Update on June 18, 2018
One of my intrepid readers asked about the application of the foregoing principles in the age of email. This point is addressed by s 244(14.1), which reads as follows:
For the purposes of this Act, if a notice or other communication in respect of a person or partnership is made available in electronic format such that it can be read or perceived by a person or a computer system or other similar device, the notice or other communication is presumed to be sent to the person or partnership and received by the person or partnership on the date that an electronic message is sent, to the electronic address most recently provided before that date by the person or partnership to the Minister for the purposes of this subsection, informing the person or partnership that a notice or other communication requiring the person or partnership’s immediate attention is available in the person or partnership’s secure electronic account. A notice or other communication is considered to be made available if it is posted by the Minister in the person or partnership’s secure electronic account and the person or partnership has authorized that notices or other communications may be made available in this manner and has not before that date revoked that authorization in a manner specified by the Minister.
This provision was added by the 2010 Budget, effective December 15, 2010.
In HLB Smith Holdings Limited v R, 2018 TCC 83, each of Holdco and a family trust (“Trust1”) held 50% of the shares in the capital of Opco. Another family trust (“Trust2”) held all of the issued shares in the capital of Holdco. Trust1 was for the benefit of W’s family; it appears Trust2 was for the benefit of M’s family. W and M were unrelated. They were the directors of Opco at all times. Opco paid dividends to its shareholders at a time when it owed income tax. Holdco paid dividends to Trust2, which allocated the dividends to M and his wife. Were the recipients of the dividends liable under section 160? Put another way, did Opco deal at arm’s length with its shareholders, who were unrelated to it? Continue reading
The following is a more detailed summary of a case about which I have written previously.
In R & S Industries Inc. v R, 2017 TCC 75, the Court held that the CRA and the taxpayers who file an election under s 85 or s 97 were bound by the agreed amounts set out in the election form (subject to the limits on agreed amounts set out in s 85). The Court, however, held that neither the CRA nor the taxpayers were bound by the other “key facts” set out on the form. Continue reading
In Kathryn Walker, “The Services Carve-Out from TOSI” Canadian Tax Focus 4:4 (May 2018), the author considers the meaning of business income from the “provision of services” in the definition of excluded shares in s 120.4(1). She notes that the Income Tax Act uses the phrase in only a few other places and provides no guidance on its meaning. The few cases that refer to the phrase do not provide any guidance either. The author speculates about the meaning to be ascribed to the phrase and concludes that “[t]his review of what “provision of services” might mean shows that large sections of the economy could be vulnerable to the new TOSI.”
In Gauthier, 2017 FC 1173, the taxpayer made a voluntary disclosure for 2005-2014 for income earned from funds he had transferred offshore in 1978. The CRA accepted the VD, waived penalties and cancelled interest for those years but then reassessed for 1980 to 2004 to impose tax, interest and penalties (for failing to file a T1135).
The taxpayer’s application for judicial review was dismissed.
The FC disagreed with the taxpayer because there was no evidence suggesting that the CRA had agreed not to undertake reassessments for earlier taxation years. Furthermore, judicial review focuses on the reasonableness of the CRrA’s decision and grants relief when there are procedural defects. Because there was no evidence of unreasonableness or procedural defects, the [Court] found no merit in preventing the Minister from exercising her discretion to reassess. The [Court] also pointed out that the orderly application of the law takes precedence over the financial and other inconveniences a taxpayer may be facing.
Priscila Padilla, “Voluntary Disclosures: Penalties Applied for Prior Years” Canadian Tax Focus 4:4 (May 2018).
The CRA accepts that a business carried on by a corporation as a member of a partnership is not a specified investment business if the partnership employs more than five full-time employees. The authors suggest that a corporation could earn ABI from rental properties “by creating a pooled ownership of multiple properties, or multiple interests in one large property” where the pooling is through a partnership that employs more than five full-time employees. A joint venture, however, will likely be less effective for this purpose because of Lerric Investments Corp. v Canada, 2001 FCA 14.
Jeanne Cheng and Tom Qubti, “Rental Income and ABI: Structuring Around the Five-Employee Test” Canadian Tax Focus 4:4 (May 2018).
From Jason Pisesky, “Incentive Effects of the New SBD Clawback” Canadian Tax Focus 4:4 (May 2018):
[Where a corporation earns ABI equal to its business limit] an extra $1,000 of rental income creates $1,307 of immediate tax in Alberta, as well as cash flow issues in certain situations. Changes in investment portfolios may be appropriate.
This harsh result is ameliorated by paying dividends, but that can be problematic because of the new split RDTOH rules.
Corporations might consider investing in less risky assets to generate less investment income or investing in growth assets to control better when returns are realized.