/U/Blog

In  an August 22, 2017  Release  (2017JTT0137-001468) it  was noted that $1,500 grants  were being offered to help resume operations  for those affected  by  BC  wildfires.   Eligible  organizations  include  small businesses, First Nations, and  non-profits  located in certain areas. For  further  details  on  qualification,  or  to  apply  for  a  grant,  visit redcross.ca. Applicants have until October 31, 2017 to apply.

ONTARIO  BASIC  INCOME  PILOT  –  SOCIAL ASSISTANCE

The  Ontario  Basic  Income  Pilot,  lasting  3  years,  will  include  lower income participants chosen at random from certain areas in Ontario (Hamilton,  Thunder  Bay,  and  Lindsay),  and  will  be  restricted  to  those between the  ages of 18 and 64. Monthly basic income payments will be responsive  to  changes  in  one’s  income,  family  composition,  and disability status. In a June 26, 2017 Technical Interpretation (2017-0704801E5, Wirag, Eric), CRA noted that the payments are based on an income  test,  and  therefore  constitute  social  assistance  payments(Paragraph 56(1)(u)). Social assistance payments are generally required to be included in an income tax return, however, may also be deductible (Paragraph 110(1)(f)).

CANADA/U.S. BORDER TRACKING

In an August 31, 2017 Canadian Press article (Ottawa sharing info with U.S. Homeland security on all Americans entering Canada, Jim Bronskill) it was noted that  data will be shared between Canada and the U.S.which includes a traveller’s name,  nationality,  date of birth, gender, the country that issued the travel document, and  date and time of crossing.

The first phase of the project did not include the exchange of information on citizens of either country (only permanent residents, foreign nationals etc.). As an interim step, an agreement was signed which now allows Canada  to supply information to the U.S. regarding American citizens. The Bill to permit the U.S. to share information on Canadian citizens  is currently at second reading in the Senate.

In  an  April  28,  2017  Technical Interpretation  (2017-0699741I7,  Waugh, Phyllis),  CRA  was  asked  whether  a reimbursement  for  tax  advisory  services obtained as a result of an employer payroll error  would be a taxable benefit.  The errors in question arose from the Phoenix pay system used  for  public service  employees  (see  VTN 422(10)).

The  Interpretation  noted  that  receipts  were  required  from  the employee, and only  costs  directly related  to the payroll  error  would be reimbursed.  CRA  indicated  that  compensation  for  a  financial  loss resulting from the  employer’s error  would not be an economic benefit to the  employee,  so  such  a  reimbursement  would  not  be  a  taxable benefit.

STOCK OPTIONS – SALE ARRANGEMENTS

In a July 14, 2017 Federal Court of Appeal case (Montminy et al. vs. H.M.Q.,  A-180-16),  at  issue  was  whether  the  taxpayers  could  claim  a 50% deduction of the benefit on the exercise of their stock options

(Paragraph 110(1)(d)).  The taxpayers exercised their stock options due to the sale of all assets of the employer corporation.  The options were exercised  and then the shares  sold  to the parent  of the employer company  the  same  day.  See  Tax  Court  decision  in  VTN  419(3) (Montminy et al. vs. H.M.Q., 2012-2142(IT)G).

The exercise and sale of shares were undertaken in conjunction with the sale of the assets of the employer corporation to an unrelated third party. The option terms originally provided for exercise of the shares on the  sale  of  the  corporation’s  shares  but  not  the  assets.  However,  the terms were amended to permit the options to be exercised in this case, in the interest of fairness to the employees.

The taxpayers reported a taxable benefit being the difference between the exercise price and the value of the shares sold to the parent.  They also claimed a deduction of 50% of the taxable benefit.

The Tax Court opined that as the employees  were required  to sell the shares to the parent corporation on the date of issuance, there was no doubt that such a sale would occur, and therefore, the share would not be a prescribed share  (defined in Regulation 6204(1)).  As a result, the deduction was denied.Among other criteria, this deduction is not permitted if the issuer of the  share,  or  certain  related  parties,  is  reasonably  expected  to redeem, acquire or cancel the share within two years  of its issuance to the employee (Regulation 6204(1)(b)).

The Tax Court also noted that an exception  which disregards the twoyear test (Regulation 6204(2)(c)) should not be applied due to the Tax Court’s statutory interpretation of the law. The Federal Court of Appeal analyzed this exception in detail.

Taxpayers win

The Court noted that the two-year test is ignored where they meet the following conditions (Regulation 6204(2)(c)):

(i)                  the  employee  to  whom  the  share  is  issued  was  dealing  at arm’s length with the employer when it was issued;

(ii)                the right or obligation is provided for in an agreement or terms and conditions of the share, and it is reasonably considered that:

1. the  principal  purpose  of providing the right or obligation is  to  protect  the  employee  against  any  loss  in  the value  of  the  share,  and  the  amount  payable  to  the employee under the right or obligation will not exceed the adjusted cost base of the share to the holder immediately before the acquisition (in other words, the value of the shares when issued to the employee); or
2. the  principal purpose  of providing the right or obligation is to provide the employee with a  market for the shareand the amount payable  for the share will not exceed fair market value of the share at the time; and

(iii)               it can be  reasonably considered  that the  amount payable  for the  share  is  not  directly  determined  by  the  profits  of  the corporation,  or  a  non-arm’s  length  corporation,  for  the  period from  issuance  of  the  option  to  disposal  of  the  shares  (an exception allows use of profits in a formula for computing the fair market value of the shares)

As all three conditions were  satisfied, the exception was met and the two-year  rule  was  disregarded,  such  that  the  shares  in  question  were prescribed shares, eligible for the deduction.

Further, the Court noted that it is not the imposition of a holding period of the  shares  that  ensures  a  risk  element  but,  rather,  the  particular characteristics of the share and minimum price at which the option must be exercised. The Court found that the Tax Court neglected to consider the  risk  the  taxpayers  bore  for the more than five years that they  heldthe  options  where the value of  the corporation could have fluctuated.  As such, providing the deduction (Paragraph 110(1)(d)) was  consistent  with the broader purpose of the stock option rules.

In  a  June  6,  2017  French  Technical Interpretation  (2015-0617331E5, Roy, Louise), CRA  considered  whether  the  transfer  of  a deceased’s TFSA to their spouse could constitute an  exempt  contribution.  To  the  extent  the payment  is  made  in  accordance  to  the  will, CRA opined that the payment is made as a result of the individual’s death.  The amount may still qualify as an exempt contribution regardless of  whether  it  is  paid  directly  to  the  deceased’s  spouse,  or  first  to  the estate, and then the deceased’s spouse.CRA also opined that the payment could be an exempt contribution where it  related  to  a  debt  due  to  the  division  of  family  property,  the dissolution  of  the  matrimonial  regime,  a  gift  made  by  marriage contract,  or  a  post-mortem  support  obligation.  An  exempt  amount must be paid during the rollover period (must occur by the end of the calendar year following the death), and the amounts must be  distributed as a consequence of the individual’s death.An  exempt  contribution  allows  for  an  addition  to  one’s  TFSA  account without reducing the available contribution room.

TESTAMENTARY  TRUST  AS  A  BENEFICIARY  OF  AN ESTATE

Where an estate, trust or beneficiary acquires a right or thing upon a taxpayer’s death, several tax consequences may arise, as follows:

• the  value  may  be  included  in  the  deceased  taxpayer’s  final income tax return (Subsection 70(1));
• the  value  may  be  reported  in  a  separate  elective  return(Subsection 70(2)); or
• the  value  may  be  taxed  when  ultimately  received  by  the beneficiary who inherits it (Subsection 70(3)).

The  beneficiary  will  be  taxable  where  a  right  or  thing  has  been transferred  or distributed  to a beneficiary  within the prescribed  time limit, no later than one year after the date of death or 90 days after the date of mailing of any notice of assessment or reassessment in respect of the year of death, whichever is later.  Where this requirement is met, the tax  liability  arises when the beneficiary  realizes  or disposes of the right or thing.  See  Interpretation Bulletin IT-212R3, Income of Deceased Persons – Rights or Things, for more information on these items.

In a June 28, 2017 French  Technical Interpretation  (2016-0653921E5, Allaire, Lucie), CRA was asked whether a testamentary trust  could be a beneficiary  of an estate  or a person beneficially interested in an estate for these purposes.

A deceased artist had previously made an election to value their artistic inventory at nil (Subsection 10(6)), allowing the individual to deduct the costs associated with the inventory in the year incurred rather than when the inventory is sold.  The artwork is considered a right or thing.  Upon the individual’s death, the artwork was bequeathed to a testamentary trust.

CRA opined that the testamentary trust could be a beneficiary of an estate or a person beneficially interested in an estate.  Therefore, if  no election  were  made  to  report  the  deceased’s  rights  or  things  in  a separate  return  (Subsection  70(2)),  the  income  inclusion  could  be deferred until when the artwork was disposed of by the testamentary trust.

CPP  SURVIVOR  BENEFIT  –  TIMELY  FILING  OF APPLICATION

In  a  May  30,  2017  Federal  Court  case  (Flaig  vs.  Attorney  General of Canada, T-538-16),  at issue was whether the taxpayer could  obtain CPP survivor  benefits  retroactive  to  the  date  of  her  husband’s  death  in 2007. The taxpayer made the application for the CPP survivor benefit in 2012.  Benefits were provided back to 2011, not the requested date in 2007.

Taxpayer loses The Court opined that as the taxpayer did not demonstrate that she was incapable of forming or expressing an intention to make an application for survivor  benefits  before  she  actually  made  the  application,  she  was unable  to  go  back  beyond  the  standard  1-year  retroactive  look back period for the benefits.

TIMING  OF  CPP  COLLECTION  –  GENDER CONSIDERATIONS

An August 10, 2017 Globe and Mail article (Why women (especially) should delay taking CPP,  by Bonnie-Jeanne MacDonald) discussed the merits of deferring application for CPP until age 70. This increasesthe monthly benefits by 42% over collecting at age 65.The article noted that a 65 year old woman  today can expect to live for 22 years, three years longer than a male. Deferring CPP to age 70 will result in total benefits about 9.7% greater than collecting at age 65.For a male, the increase would be about 6.1%.

The  article  also  noted  further  reasons  to  draw  extra  funds from an RRSP from age 65 to age 70 and defer CPP application, including the following:

1.  reduced investment risk  as the funds to be withdrawn from the RRSP would presumably be held in low-risk assets;
2. inflation protection as CPP is fully indexed;
3.  reduced risk of outliving one’s retirement income, as CPP is guaranteed for life;
4. less stress from managing investments; and
5. reduced  exposure  to  fraud  –  and  to  pressure  from  relatives seeking loans – by reducing accessible savings.

The article noted that women  tend to be more  risk-averse, leading to a preference  for  the  guaranteed  income  provided  by  CPP.  It  also  noted many other considerations  which may suggest  collecting CPP earlier, such as an expectation of a shorter lifespan.

Finally,  the  article  suggested  that  women  expecting  to  be  eligible  for Guaranteed Income Supplement  (GIS) payments should  apply  for  CPP at age 60 as CPP will erode their GIS eligibility. As well, lower income seniors tend to have shorter lifespans.

FINANCE RELEASES  ( www.canada.ca/en/department- finance.html )

1.  September  5,  2017  –  Finance Minister  Bill  Morneau  and  Minister  of Small Business and Tourism, Bardish Chagger,  are  undertaking  a  cross country  listening tour  with respect to  the  proposed  changes  to  the CCPC taxation.

2. October  3,  2017  –  Late  Breaking:  As  the  consultation  period regarding taxation of private corporations comes to an end, those proving submissions were thanked. The next steps will be based on  the  following  key  principles:  keeping  taxes  low  for  small businesses;  avoiding  unnecessary  red  tape;  ensuring  that  the transfer  of  a  family  business  to  the  next  generation  is  not affected; and conducting a gender-based analysis. No specific step or timeline was provided.

CRA RELEASES  ( www.canada.ca/en/services/taxes/income – tax.html )

1.  September  1,  2017  –  A  CRA  news  release  announced  that  an office  will  be  opened  up  in  Whitehorse,  Yukon,  to  support residents with their filing obligations.  The centre will also focus on providing  specialized  support  to  businesses  and  individuals  in context  of  northern  resident  issues  (such  as  the  northern resident deduction).

2.  August  21,  2017  –  CRA  announced  that  it  has  begun  making automated courtesy calls  notifying registered charities  that the  due  date  for  filing  their  completed  information  return  is approaching.  A charity’s status may be revoked if it doesn’t file.3.  August 9, 2017  –  A CRA news release commented on schemes that claim that taxes don’t have to be paid. Discussed were the “tax protester” and “natural person” movements.

4.  August 2017 –  CRA announced that a  webinar  information session for  employers  who  have  questions  on  the  small  business deduction will be held on October 18, 2017.

Taxpayer wins – mostly :The  taxpayer  must  use  reasonable  procedures  to verify  that  suppliers  are  valid  registrants,  their registration  numbers  actually  exist  and  are  in  the name  of  that  person.  The  Court  held  that  the taxpayer’s  procedures  (reviewing  the  suppliers’ registrations,  stamped  by  Revenue  Quebec)  were generally  sufficient  to  meet  the  documentation requirements  (Excise Tax Act Subsection 169(4)).  It was  not  relevant  that  some  suppliers  did  not  have scrapyards  and/or  vehicles  to  carry  on  scrap  businesses,  nor  that payment  was often made  in cash, making it difficult to verify the suppliers’ revenues.  The taxpayer could not be expected to query government officialsto ensure that GST registrations were properly issued.However, in respect of one supplier, the facts showed that the taxpayer had been  sloppy  to the point of  gross negligence  in accepting evidence of registration where it was clear that the  registered supplier  was not acting on their own account. Those ITCs were properly denied, and the related gross negligence penalty upheld.As  well,  one  purchase  was  made  on  the  date  the  supplier’s registration was cancelled, so the supplier was not a registrant on that date, and the  ITC  was properly denied.  However, the related  gross negligence  penalty  was  reversed,  based  on  the  due  diligence undertaken in respect of the supplier previously.

Finally, the Court held that a  rebate for  GST/HST paid in error  (Excise Tax Act Subsection 261(19)) does not apply where the error arises due to the taxpayer’s negligence, or because the payment is made to a nonregistrant, including a supplier whose registration has been cancelled.The  purpose  of  the  rebate  is  not  to  allow  the  taxpayer  to  recover GST/HST from the Crown when the erroneous payment to the supplier results from taxpayer’s failure to exercise proper care and attention.

SINGLE SUPPLY – SERVICES PROVIDED INSIDE AND OUTSIDE OF CANADA

In  a July 11, 2017  Federal Court of Appeal  case (Club Intrawest vs. H.M.Q.,  A-249-16),  at  issue  was  what  portion  of  resort  fees  paid  by members of the Intrawest program would be  subject to GST.  Fees  paid provided access  to resorts in Canada, the U.S., and Mexico.  The fees were  used  primarily  to  administer  the  program,  maintain  the properties, and build a  reserve fund.  The taxpayer had argued that the portion of the fee related to the properties outside of Canada should not be  subject to GST/HST  according to the place of supply rules  in Section 142 of the Excise Tax Act.

In the original Tax Court of Canada case (Intrawest vs. H.M.Q., 2012-3401(GST)G), the Court found that the fees were for a single supply of service,  and  that  part  of  the  service  was  provided  in  Canada, therefore GST/HST was applicable to the entire fee.

Taxpayer wins-Generally, once it has been determined that there is a single supply, the entire charge  is either subject to  GST/HST or not.  The Federal Court of Appeal  determined,  that  even  though  the  service  was  paid  in  a  single payment,  an  alternative  approach  was  required  to  recognize  that ultimately the services  were distinct:  services provided inside Canada and those provided outside. These were two separate supplies, so the single supply provisions did not apply.

The  Federal  Court  of  Appeal  agreed  that  the  taxpayer’s  original proposal  to charge GST/HST based on the proportion of costs in Canada to  the  total  membership  costs  would  more  fairly  and  reasonably reflect the nature of the supply.

AGENCY AGREEMENT In a June 9, 2017 Tax Court of Canada case (572256 Ontario Ltd. vs. H.M.Q.,  2015-4326(GST)I),  the  Court  reviewed  whether  an  entity’s management  contract  to  maintain  real  property  of  the  taxpayer constituted an  agency agreement.  If it did, the taxpayer was eligible to claim input tax credits  for purchases made by the management entity.

Taxpayer wins The  management  agreement  identified  the  property  manager  as an agent of the property owners. This status was questioned because the manager  had  acquired  the  parking  area  related  to  the  other  real estate.  Although  no  written  documentation  existed  to  support  the relationship,  the  Court  concluded  that  the  parking  area  was  held  as  a bare  trustee,  and  the  manager  acted  as  agent  in  respect  of  that property  as  well.  The  taxpayer  was,  therefore,  entitled  to  input  tax credits.

An article by Rotfleisch & Samulovitch P.C. (Canadian Tax Law Firm Complete Guide To CRA T1135 Forms, by David Rotfleisch) discussed a variety of issues related to the T1135 form, including the following:

•  Specified foreign property (SFP; defined in Subsection 233.3(1)) may  include  copyrights  and  patents,  insurance  policies, precious metals and futures contracts, in addition to assets more commonly considered.

•  Shares  of  a  Canadian  corporation  listed  on  a  foreign  stock exchange, paying dividends in a foreign currency, are not SFP.

•  Shares of a  Canadian corporation  held in a  foreign brokerage account are SFP.

•  Shares  of  a  foreign  corporation  listed  on  a  Canadian  stock exchange are SFP.

•  The cost amount of depreciable property changes over time.

•  American  Depository  Receipts  (ADRs)  trade  in the U.S. but represent  shares  of  non-U.S.  corporations,  making determination of the country to disclose challenging.

The article also discussed property not required to be reported, filling out the form, filing deadlines, and penalties for failure to file and for errors.

SERVICES TO A FOREIGN GOVERNMENT

In a May 15, 2017 French  Technical Interpretation  (2016-0645891E5, Grégoire, Sylvain), CRA opined that they do not generally consider health services  provided  to  the  general  public  to  constitute  services  to  the government.  As  such,  a  retirement  pension  received  under  a  Swiss canton’s pension plan, in respect of nursing services provided to the general public, would  not be exempt  under the Canada-Switzerland Tax Treaty.

Comments- Although  the  specific  question  related  to  the  Income  Tax  Treaty  with Switzerland, many Treaties provide special exemptions for income derived from  services  to  one  of  the  two  nations’  governments  (including  the Treaties  with  the  United  States  (Article  XIX)  and  the  United  Kingdom (Article 18), and the Model Convention of the Organisation for Economic Co-operation and Development (OECD; Article 19)).

PROPERTY FORECLOSED FROM A NON-RESIDENT

In a June 20, 2017 Supreme Court of British Columbia case (Scotia Mortgage Corporation vs. Gladu, Docket H22861, 2017 BCSC 1182), the holder  of  a  mortgage  on  Canadian  real  estate  owned  by  a  nonresident  asked  the  Court  to  declare  that  the  purchasers  of  three foreclosed  properties  did  not  acquire  the  properties  from  a  nonresident person.  The case indicates this was for purposes of Section 116 of the Income Tax Act.

The  Court  held  that  it  was  effectively  being  asked  to  rule  that  the purchasers  were not required  to  withhold and remit  a portion of the purchase price (25% of proceeds  by default) in accordance with Section 116,  as  is  normally  required  where  Canadian  real  estate  is  purchased from a non-resident. Jurisdiction over income tax matters rests with the  Tax Court of Canada.  The Court held that it lacked jurisdiction  to rule in this matter or, to the extent it had jurisdiction, declined to rule in favour of the Tax Court.

Comments

Presumably,  neither  the  purchasers  of  the  property  nor  the  mortgage holders wanted to be at risk of a later assessment for taxes which should have been withheld.  An Advance Tax Ruling  might be considered for such a situation.

SALE OF U.S. LIMITED PARTNERSHIP (LP) INTEREST

In  the August edition of Canadian Tax Highlights (No Tax on Sale of US LP Units, Thomas W. Nelson, Hodgson Russ LLP, Buffalo), the U.S. taxationon  the  disposition  of  an  interest  in  a  LP  by  a  foreign  entity  was discussed  in  the  context  of  a  recent  U.S.  Tax  Court  case  (Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Commissioner, July 13, 2017).

The U.S. Tax Court determined that such dispositions should be treated on an entity basis (the sale of a single asset, being the LP interest) rather than an underlying asset basis (the sale of the LP’s assets). In addition, the Court opined that the gains on such a sale constituted non-effectively connected income (which is exempt from U.S. tax).

In other words, the Court found that the gains  from the disposition of an interest in an LP by a foreign entity would be exempt from U.S. taxation.

This  decision  is  contrary  to  the  IRS’  long-standing position  (Revenue  Ruling  91-32)  which  held  the contrary.  The  article  noted,  however,  that  such precedence may not be applicable where a significant amount of the partnership’s assets include real property (where  the  Foreign  Investment  in  Real Property  Tax Act,  FIRPTA,  regulations  override  the  non-tax treatment). The author of the above article noted that this case is likely to be appealed.

U.S. PARTNERSHIPS LATE FILING –  SOME IRS RELIEF

For  calendar  year  partnerships,  the  due  date  for  filing  the partnership’s tax return to the IRS in 2016 was changed to March 15from April 15.  Many partnerships filed their returns by the former April 15 deadline and, if not for the change, would have filed their returns on time.Due to the change, they were late.

On September 1, 2017, the IRS released IR-2017-141 which provided relief  for these partnerships  where, essentially, the returns were filed with the IRS and furnished copies provided to the recipients by the date that would have been timely in prior years (April 15), or a request for an extension of time was filed by the April 15thdate.  Taxpayers who qualified for  this  relief  will  not  be  considered  to  have  received  a  first -time abatement under IRS’s administrative penalty waiver program.

Partnerships that have already been assessed a penalty but qualify for relief should be receiving a letter in the coming months notifying them of the relief.

SALE OF A CANADIAN PROPERTY BY A U.S. PERSON

An article in the August edition of Canadian Tax Highlights (US Citizens Living in Canada: Foreign-Currency Gain, Roy Berg of Moody’s LLP and  Alexey Manasuev of US Tax IQ) reminded practitioners that, while the gain on a principal residence by a Canadian resident may be exempt from tax, other tax consequences may exist for U.S. taxpayers.

The U.S. allows an individual to exclude up to US$250,000 from the sale or  exchange  of  their  principal  residence  from  gross  income.  Gains  in excess of this may be subject to U.S. tax.

Also, foreign currency exchange gains or losses on the disposition of  the  property,  as  well  as  the  mortgage  repayment,  must  be considered.  For  example,  consider  a  property  that  was  acquired  for CAD$1 million when the Canadian and U.S. dollar were at par but sold for CAD$1.1 million when the Canadian dollar had weakened to $0.75 on the U.S. dollar. A CAD$800,000 mortgage is acquired on the property.

For U.S. tax purposes, a capital loss of $175,000 (($1.1M x 0.75) –  ($1M x  1))  is  experienced.  The  repayment  of  the  mortgage  is  subject  to  a $200,000 foreign exchange gain (($800,000 x 1) – ($800,000 x 0.75)).While  the  taxpayer  is  not  subject  to  tax  on  the  sale  (due  to  the  loss position), they are  subject to tax on the foreign exchange gain on the mortgage repayment.

With the weakening in the value of the Canadian dollar against the U.S. dollar, a  U.S. citizen selling his residence  in Canada may experience a large U.S. loss.

 In  a  June  22,  2017  Tax  Court  of  Canada  case(Grant  vs  H.M.Q.,  2014-1399(IT)G),  at  issue  was whether the director of a corporation  could be held liable  for  $66,865  in  unremitted  source  eductions, related  penalties,  and  interest  six  years  after  the corporation went bankrupt. The taxpayer presented various defenses.

Two-Year Limitation

According  to  IC89-2R3,  Director’s  Liability,  CRA  must  issue  an assessment against the director within two years from the time they last ceased to be a director.  The taxpayer argued that since he was forced  off  the  property  and  denied  access  by  the  Trustee  in bankruptcy more than two years before the assessment he would not be liable. However, the Court determined that only once one is removed as director  under the governing corporations act  will such liability be absolved.  In  this  case  (under  the  Ontario  Business  Corporations  Act), bankruptcy  does  not  remove  directors  from  their  position.  As  the taxpayer  never officially ceased to be a director, the two-year period had  not  commenced  and,  therefore,  had  not  expired  at  the  date  of assessment.

Due Diligence

Liability can be absolved  if the director  can show due diligence.  In this case the director argued that  he was waiting for large investment tax  refunds  to  fund  the  liability  and  also  entered  into  a  creditor proposal so as to enable the corporation to continue in order to pay off the liability. However, the Court noted that diligence was required to prevent non-remittance rather than simply diligence to pay after the fact.  As  there  was  insufficient  proof  to demonstrate diligence  at the prevention stage, this argument was also unsuccessful.

With All Due Dispatch

The taxpayer argued that the issuance of the assessment 6 years after bankruptcy was inordinate  and unreasonable, thereby contravening the requirement to assess with  all due dispatch  (Subsection 152(1)).The  Court,  however,  found  that  this  requirement  related  to  the assessment  of  a  filed  tax  return  or  objection  as  opposed  to  the assessment of director liability.  In particular, the provision  governing the charging of director liability provides that “The Minister may at any  time  assess  any  amount  payable”  (Subsection  227.1(1)).Therefore, this defense was also unsuccessful.Technical  arguments  were  also  made  relating  to  the  bankruptcy procedure; however, the same result was reached in those cases as well. The Minister’s assessment of liability to the director was upheld.

In  a  June  21,  2017  French  Technical Interpretation  (2016-0678361E5,  Seguin, Marc), CRA opined that a  deemed gain  due to a limited partner’s negative adjusted cost base  (under Subsection 40(3.1)) could  not  be added  to  that  limited  partner’s  capital dividend  account.  CRA  opined  that partnership  income  generally  retains  its  nature  and  character  when allocated out to partners.

DEBT FORGIVENESS – TIERED PARTNERSHIPS

When  a  commercial  obligation  is  settled  or  extinguished  for  an amount less  than the  principal amount  of the debt, Section 80 applies the  debt  forgiveness  rules.  CRA  notes  that  the  forgiven  amount  is applied to reduce “tax balances” or is included in the debtor’s income under Subsection 80(2) or (13).

Section 80 requires that the forgiven amount be applied in the following order:

• non-capital losses (Paragraph 80(3)(a));
• farm losses (Paragraph 80(3)(b));
• restricted farm losses (Paragraph 80(3)(c));
• allowable business investment losses (Paragraph 80(4)(a)); and
• net capital losses (Paragraph 80(4)(b)).

After the mandatory application of the forgiven amount, the debtor may elect to apply the remaining forgiven amount to reduce the capital cost of  depreciable property  (Subsection 80(5));  cumulative eligible capital  (Subsection 80(7));  resource expenditures  (Subsection 80(8)); capital  properties  (Subsection  80(9));  certain  shares  and  debts(Subsection  80(10));  certain  shares,  debts  and  partnership  interests (Subsection  80(11));  and  current  year  net  capital  losses  (Subsection 80(12)).  If  there  is  still  a  residual  balance,  half  of  the  amount  will  be added  to  the  taxpayer’s  income  (Subsection  80(13)).  The  rules  are modified slightly for partnerships.

In  a  March  22,  2017  Technical  Interpretation  (2016-0666481E5, Gibbons, Jim), CRA considered the impact of the debt forgiveness  rules on a forgiven amount in a tiered partnership.  While general comments were  provided,  CRA  specifically  opined  on  the  implications  where  a bottom partnership (BP) is wound up into the top partnership (TP) in the  same year a forgiven amount is included in the BP’s income(Subsection 8(13)).

CRA  noted  that  the  BP  would  have  a  deemed  year-end  immediately before the time it ceased to exist.  Therefore, the BP’s income  inclusion would occur in the deemed fiscal period, and, as a partner of the BP, the TP could deduct an amount in respect of the relevant limit which would then be deemed to be a commercial debt obligation that the TP issued  and  was  settled  at  the  end  of  the  BP’s  deemed  fiscal  period (Subsection 80(15)).  The TP  could then apply the forgiven amount  to their own tax attributes (under Subsections 80(5) to (10)).

CRA also noted that the forgiven amount  could only be  applied  against the adjusted cost base of the TP’s interest in the BP if the BP and theTP were not related  (e.g. the TP only had a minority interest in the BP) under Subsection 80(9).

The balance of any forgiven amount, after applying Subsections 80(5) to (10), would be included in the TP’s income (Subsection 80(13)) and allocated to its members.

As  the  TP  would  be  deemed  (Subparagraph  80(c)(i))  to  have  issued  a commercial debt obligation that was settled at the end of the BP’s deemed fiscal period, Subsection 8(15) would also apply to the partners.  Thus, the partners would be able to claim a deduction  (Subparagraph 80(15)(a)) up  to  the  relevant  limit  which  could  then  be  treated  as  a  forgiven amount and applied against the taxpayer’s own tax attributes

In  a  February  20,  2017  Tax  Court  of  Canada case  (Mullings  vs.  H.M.Q.,  2016-2938(IT)I),  at issue was whether  preventative care  associated with phenylketonuria (PKU) would be eligible for the  DTC.  Without  the  ongoing  care  and  strict monitoring  of  the  individual’s  diet,  permanent and severe rain damage would occur.

An individual may be eligible for the credit (Subsection 118.3(1)) where the  ability  to  perform  a  basic  activity  of  daily  living  is  markedly restricted or would be markedly restricted but for therapy that:

• is essential to sustain a vital function of the individual;
• is required to be administered  at least three times each week for a total duration averaging not less than 14 hours a week; and
• cannot  reasonably  be  expected  to  be  of  significant  benefit  to persons who are not so impaired.
• The types of activities which count towards the 14 hours (Subsection 118.3(1.1)) include:
• time  away  from  normal  everyday  activities  in  order  to  receive therapy;
• time spent on determining the dosage of medicine where regular doses are required and daily adjustments are needed; and
• time  spent  by  a  child’s  primary  caregiver  performing  or supervising therapy which the child cannot perform on their own.

Time spent on certain activities do not count towards the 14 hours(Subsection 118.3(1.1)).  This includes  time spent on activities related to:

• dietary or exercise restrictions or routines;
• travel time;
• medical appointments; and
• shopping for medication or recuperation after therapy.

Taxpayer wins

The  Court found that the  following activities counted  towards the 14-hour requirement:

• weekly blood tests;
• the  primary  caregiver’s  time  spent  administering  the  child’s treatment;
• medical appointments where there is actual treatment or testing that is part of the treatment; and
• counting  and  analysis  of  the  number  of  milligrams  of phenylalanine (found in many foods) ingested. This activity was considered  more  akin  to  the  administration  of  medicine  rather than the activities related to dietary restriction.

The taxpayer’s time spent on the above activities exceeded the 14-hour requirement per week, and therefore the DTC claim was allowed.

In a June 21, 2017  Tax Court of Canada  case (Lawson vs. H.M.Q., 2015-3474(IT)I), at issue was whether the wholly dependent credit  could be claimed where only one party  was  providing a cheque  which represented the  net  of  each  party’s  child  support  liability.Where  both  parties  are  required  to  pay,  either  may claim  the  credit  (Subsection  118(5.1)).  At  issue  was whether the agreement, in fact, created two obligations to pay or just one.

Taxpayer wins

While the Court expressed concern that minor wording differences in an agreement  could  cause  a  credit  to  be  available  or  not,  the  Court determined that in this situation there truly was an obligation on each person’s part. As such, the credit was allowed.

Specifically, the Court noted: “..where a separated couple rely on CRA commentary suggesting there can be one cheque  for  convenience sake, where the couple draft their agreement with the intention to create mutual requirements to pay, where  the  net  payment  is  not  based  solely  on  the  Guidelines  but represents an obligation of one side to make payments towards travel expenses of the other and where a subsequent written agreement is accepted  by  the  CRA  while  not  altering  the  prior  agreed-upon arrangement, I am prepared to interpret the separation agreement as creating  two  obligations  and  not  simply a means of calculating one support payment.”

The Court also gave particular credence to minutes of the settlement that stated precisely the  gross amount  that each party should pay. For specific excerpts from the settlement agreement, see the Ruling.