We all know that section 56.4 of the Income Tax Act (Canada) is a hot mess. A recent CRA technical interpretation (2017-0688301I7) (TI) illustrates well one of the reasons why. Continue reading
You buy a vacant lot, build a home on it, move into the home for a few weeks and then you sell the home for a tidy profit very soon thereafter. You claim the principal residence exemption (the PRE) so that you don’t pay any tax on the profit, or so you think. The CRA, of course, has other ideas. It reassesses you on the basis that you engaged in an “adventure in the nature of trade”. That is, the CRA takes the position that you were carrying on business, of a sort, and so it treats the profit as ordinary business income. The full amount of the profit is included in your income, rather than one-half, and the PRE applies only to capital gains, not business income. The CRA also assesses GST as if the taxpayers were home builders. See Sangha v R, 2013 TCC 69, which applied the factors set out in Happy Valley Farms Ltd. v R,  2 C.T.C. 259, 7 F.T.R. 3, 86 D.T.C. 6421 (FCTD), to determine whether the appellants engaged in an adventure in the nature of trade.
Alex Klyguine, in “Income Splitting After the New Private Corporation Proposals: Salaries Paid to Family Members” 8:1 Canadian Tax Focus (February 2018), discusses Gabco Limited v MNR, 68 DTC 5210 (Ex. Ct.)), and suggests that “the boundaries of the reasonableness test may become the new frontier for income splitting in private corporations.” What is “reasonable”? Fair market value is not necessarily the relevant standard. In Gabco, the court wrote:
It is not a question of the Minister or this Court substituting its judgment for what is a reasonable amount to pay, but rather a case of the Minister or the Court coming to the conclusion that no reasonable business [person] would have contracted to pay such an amount having only the business consideration of the appellant in mind.
A CCPC might want to assign a portion of is small business deduction limit to another corporation because of the specified corporate income rules. The assignment will be problematic, however, if the assignor’s year-end occurs before that of the assignee. The assignor will not know the amount of the income earned by it from the assignee, and so the assignor will not know how much limit to assign. An excessive assignment might invalidate it. (Will an assignment be invalidated if a reassessment of the assignee reduces the income earned from the assignor?) Will amending returns help? Perhaps, but it will be a compliance nuisance.
Dino Infanti “Assignment of Small Business Limit Creates Filing Headaches” 18:1 Tax for the Owner-Manager (January 2018)
Postscript February 6, 2018: See also Tanya Budd and Trent Robinson, “Specified Corporate Income When Year-Ends Differ” 8:1 Canadian Tax Focus (February 2018).
Finance is not proceeding with the July, 2017, proposals to amend 84.1 and introduce new 246.1. Also, Finance has said that it will focus on developing the passive income proposals. Finance has also said, however, that it believes post-mortem gains in a private corporation should be taxed at the dividend rate and not the capital gain rate. Should advisers implement inter vivos pipelines to anticipate rules aimed at the post-mortem variety?
Issues for the pipeline remain with the July proposals. For example, see 120.4(4) and (5). [This article was written before the release of the December version of the TOSI rules.]
Manu Kakkar “The Pipeline Comes Back to Life (But for How Long?)” 18:1 Tax for the Owner-Manager (January 2018)
Using “a textual, contextual and purposive analysis”, the Tax Court in Zhang v R, 2017 TCC 258 (informal procedure), concluded that “may deduct” in ‘D’ in the formula in 118.61(1) meant “is entitled to deduct” rather than “chooses to deduct”.
A corporate-recipient of a capital dividend is entitled to add the amount of the dividend to its capital dividend account at the time the dividend is received even where the relevant election is late-filed. CRA technical interpretation 2017-0718311E5.
The CRA has a new ‘project’ underway. This time the target is employees who deduct employment expenses under section 8 of the Income Tax Act. The CRA seems to be on the lookout for employees who are also shareholders of the corporate employer. The impetus for this scrutiny appears to be Adler v R, 2009 TCC 613 (informal procedure). The taxpayer was an employee of a corporation of which he was also the sole shareholder, director and officer. The taxpayer had deducted employment expenses under section 8. Was he entitled to deduct the expenses? At ¶22 of his judgment, Justice Webb (as he then was) wrote:
[I]t seems to me that in order for the Appellant to satisfy the requirement that he was required to pay for the expenditures that were incurred the Appellant would have to establish that there would be some consequences that would be detrimental to the Appellant if he failed to fulfill the obligation. In this particular case, what consequences would arise if the Appellant refused to incur the expenditures? Since the Appellant was the sole officer, director and shareholder of his employer it seems obvious that if the Appellant were to refuse to incur the expenditures that there would be no adverse consequences for him. One cannot imagine the Appellant, as President of Island Ink-Jet Manitoba Ltd., seeking to have the company sue the Appellant for breach of contract, taking any disciplinary action, or writing a poor performance review of the Appellant. Therefore, it seems to me that he chose to pay these amounts personally rather than have the company pay for these expenditures (either directly or by reimbursing the Appellant) and that the Appellant was not required to do so as an employee. There would be no consequences detrimental to the Appellant, if he did not personally pay the expenses or carry out the duties.
On the basis of the foregoing reasoning the Court dismissed the taxpayer’s appeal.
Update 2018 01 13 From the CRA website:
The Canada Revenue Agency (CRA) announced that David Gnanaratnam of Toronto, Ontario, was sentenced November 30, 2017 in the Ontario Court of Justice in Toronto to a conditional sentence of six months and a court imposed fine of $30,000. Mr. Gnanaratnam had previously pleaded guilty on November 23, 2017, to one count of evading income tax under the Income Tax Act.
A CRA investigation revealed that in the course of operating a tax preparation business, Mr. Gnanaratnam claimed false employment expenses on the personal tax returns of 24 of his clients for the 2013 tax year. As a result, Mr. Gnanaratnam wilfully evaded or attempted to evade payment of taxes by his clients totalling $36,035.
These days, in so many aspects of our lives, we are the product (as the saying goes). Retailers, for example, offer loyalty programs because, among other things, they allow our spending habits to be tracked. It turns out that the retailers aren’t the only entities interested in our spending habits, however. The CRA could use these programs to determine whether we have unreported income (eg by obtaining information about our cash purchases from a retailer). See Steven Raphael and Robert G. Kreklewetz, “Loyalty Program Data May Assist the CRA” 25:10 Canadian Tax Highlights (October 2017), which discusses Rona Inc. c Canada (Revenu national), 2017 CAF 118.
Donald Cherniawsky, in “Are Dividend Refund Claims by Dividend-Paying Corporations Elective?” 17:4 Tax for the Owner-Manager (October 2017), refers to CRA technical interpretation 2016-0649841E5. The TI states that a dividend payer could elect not to claim a dividend refund in a taxation year. This would be helpful in a butterfly where the dreaded circularity problem might otherwise arise. Mr Cherniawsky notes, however, that there are practical problems to the approach, not the least of which is CRA audit hostility to the “election” and T2 software, which won’t allow overriding the dividend refund claim.