According to Neil Armstrong’s summary of Alexandra MacLean’s paper at the 2018 CTF Annual Conference (“CRA Audits of Large Corporations – The view from ILBD”), CRA Tax Services Offices and programs are assessed by “tax earned by audit” for the purposes of allocating resources. The result, predictably, has been that auditors made adjustments that, too often, needed to be reversed by Appeals.
Although Ms MacLean’s paper is about large audits, her observation seems apt for owner-managed businesses as well. Accountants who represent such clients have mentioned to me repeatedly a growing intransigence on the part of CRA auditors. I have encountered a number of audits where Appeals ended up making large changes because the audits weren’t well founded in the facts or the law (or both).
Apparently the CRA is working to fix this problem. Ms MacLean also notes, however, that the CRA is dealing with statutes where there is “substantial interpretive uncertainty”. She expressed confidence that the government would move forward quickly with a comprehensive review of those statutes for the purpose of reforming and simplifying them so that business owners and other taxpayers will have more confidence they are complying with the law when filing tax returns.
Ha ha ha ha. I made up that last part, of course. In reality, we’ll be stuck with the patchwork mess that is the Income Tax Act for at least the remainder of my professional life.
Unfortunately, taxpayers sometimes play fast and loose with the legalities surrounding family trusts. Sometimes trustees will purport to make distributions from a trust to its beneficiaries. The beneficiaries treat the amounts received as income for tax purposes, but then those amounts end up in the hands of other individuals, often the parents of the beneficiaries in question, who are often also the trustees of the trust (fiduciary obligations be damned). The CRA, when it audits a trust, will look closely at its distributions to determine who actually enjoyed the benefit of them.
In Laplante c Canada, 2018 CAF 193 [French only], the taxpayer paid more attention to the legalities but then ran afoul of the civil law equivalent of the “sham” doctrine. The trust, pursuant to written resolutions, distributed gains realized on qualified small business corporation shares to family members of the trustee/taxpayer. The family members received cheques for the distributions from the trust but endorsed the cheques to the taxpayer and signed deeds of gift giving the money to him. The family members claimed the capital gain exemption; the taxpayer paid their resulting minimum tax liabilities. The Court held that the taxpayer was the true beneficiary of the payments in question. [Summary in English from taxinterpretations.com here.]
Owen J, in Morrison v R, 2018 TCC 220, writes the following about the burden of proof relating to the Minister’s assumptions:
 The Federal Court of Appeal makes two important points in these decisions [Transocean Offshore Ltd. v R, 2005 FCA 104, and R v Anchor Pointe Energy Ltd., 2007 FCA 188]. First, the issue of whether assumptions of fact should be taken as true is one of fairness to the taxpayer. Second, assumptions regarding facts that are exclusively or peculiarly within the knowledge of the Minister may not be treated as true. The “”may”” in the second point simply recognizes that in determining whether or not to treat the assumptions of fact as true, the Court must consider whether an affirmative decision would be unfair to the taxpayer in the circumstances. If there is no unfairness to the taxpayer the assumption may stand as true even if exclusively or peculiarly within the knowledge of the Minister. The outcome in any given situation will depend on all the relevant circumstances.
 The word “”exclusively”” is clear in its meaning: the Minister is the only person that has the information. I assume the word “”peculiarly”” is similarly being used in the sense of belonging to or pertaining to the Minister, or in the sense of being unique to the Minister.
 I have considerable difficulty understanding how facts obtained by the Minister through the audit of the Appellants and the Programs in which they participated are exclusive or peculiar to the Minister. Save for the audit, the facts are outside the purview of the Minister’s knowledge and are clearly known by others involved in the Programs even if not known by the Appellants.
 The Appellants consciously chose to participate in the Programs with little or no knowledge of what went on behind the curtain, so to speak. In such circumstances, it is not unfair to the Appellants to allow the Minister to assume what went on behind the curtain.
Retired, or soon-to-be retired, lawyers will be happy to know that Hamilton’s own Justice Bocock has held that fees paid for file storage by a retired lawyer are deductible even though the lawyer is no longer earning business income. Sounds reasonable. The Court, however, felt it necessary to add the following:
 The Respondent did not raise the issue of reasonableness in her reply. The Court notes that such expenses are presently so, being only 3 years after cessation of providing “active” legal services. However, given the advances in technology, the reduction of Ms. Tournier’s annual storage costs is possible through digitization and planned destruction. An argument of unreasonableness may be available should those best practices not be undertaken in future, but presently this is not the case.
These comments are obiter, of course, but they are somewhat troubling. They suggest the professional must digitize files to reduce storage fees. Digitization, however, can be expensive. Will the storage savings be offset by the costs of digitization? Will the CRA accept that digitization, which will likely be a large one-time cost, is a deductible expense? Is the CRA entitled to second-guess the business judgment of the professional and demand digitization as a way of ameliorating storage fees? What happens if the professional believes that the original files are the best means for meeting his or her obligations to former clients and the run-off insurer?
Tournier v R, 2018 TCC 229 (informal procedure)
Jin Wen and Michelle Dickinson, “Are Shares Tainted Forever Under Subsection 84.1(2.1)?”, 8:4 Cdn Tax Focus (Nov 2018), discusses the rule in subsection 84(2.1), which grinds PUC as if a vendor had claimed the capital gain exemption but never does, if the vendor claims a reserve the transfer (see CRA document 2015-0594461E5 (May 20, 2016) and the CRA’s response to the STEP Roundtable, question 17). The authors suggest deliberately disqualifying shares as qualified small business corporation shares to avoid the application of s 84.1(2.1).
The taxpayer in Canaada (National Revenue) v Stankovic, 2018 FC 462, had held a bank account in Switzerland that French authorities disclosed to the CRA under the French treaty. The French authorities, it appears, had obtained the information about the account in contravention of French law.
The taxpayer tried to oppose a compliance order on Charter grounds on the basis that the CRA inquiry related to the taxpayer’s potential criminal liability and that the information from the French authorities had been obtained illegally.
After applying the Jarvis (2002 SCC 73) factors, the Court held that the CRA inquiry was civil in nature so that the Charter did not protect the taxpayer. Moreover, the Court held that the CRA had obtained the information in question legally. That the French authorities might have obtained the information illegally did not violate the Charter because it applies only to Canadian state actors.
Anthony Sylvain, “The CRA’s Win Against Undisclosed Offshore Accounts” 8:4 Cdn Tax Focus (Nov 2018).
Landbouwbedrijf Backx BV v R, 2018 TCC 142, considered the residence of corporation under the laws of the Netherlands whose director was resident in that country but whose only shareholders were resident in Canada.
In respect of Backx BV’s place of residence, the TCC noted that central management and control generally resides with a company’s board of directors. However, if significant management decisions are made by parties independently of the company’s directors, the jurisdiction of residence of those parties may determine the residence of the company.
In order to establish that persons other than the directors controlled the company, there must be cogent evidence demonstrating that management decisions were made independently by those other persons. In the case at hand, the TCC held that the shareholders had essentially been instructing the director on how to perform her duties, and that she was otherwise performing only administrative and clerical functions. Furthermore, the TCC found that the director had no experience in dairy farming, received little remuneration for her work, and had not even been copied on correspondence with accountants and tax advisers.
Daniel Shiff, “Treaty Benefits and Corporate Residence Determined by Location of Control” 8:4 Cdn Tax Focus (Nov 2018).
In Laliberté v R, 2018 TCC 186, the Tax Court considered whether the controlling shareholder of Cirque du Soleil had received a $38 million shareholder benefit for a trip he took to the International Space Station that was paid for by his corporation. The Court analyzed the facts in detail and concluded that the trip was primarily personal in nature (it was a trip the founder would have taken regardless of the business done during the trip). Nora Fien, “Shareholder Benefit for Space Trip” 8:4 Cdn Tax Focus (Nov 2018).
In E Hamelin, “Surplus Stripping: A New Approach?” 18:4 Tax for the Owner-Manager (October 18, 2018), the author notes that the Court in Pomerleau v R, 2018 FCA 129 seemed to treat the one-half portion of a capital gain that is “tax free” as an amount that is untaxed for the purposes of a section 84.1 purpose analysis. Mr Hamelin writes
Will this new approach have an impact on the surplus-stripping operations currently accepted by the tax authorities or validated by the courts that involve, directly or indirectly, capital gains? Examples include two-step pipeline transactions, either post mortem or inter vivos, for the purpose of distributing a corporation’s surplus through the realization of a taxable capital gain (sale of shares to an individual to trigger a taxable capital gain before a subsequent sale to a corporation), and gains such as those realized in Gwartz v. The Queen (2013 TCC 86).