Tag Archives: Income Tax Act (ITA)

Tax Court: arrears interest after GAAR assessment accrue from the taxpayer’s balance-due day

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Tax Court confirms that arrears interest on taxes resulting from GAAR assessment accrue from the taxpayer’s balance-due day

In Quinco Financial Inc. v. R. (2016 TCC 190), the Minister of National Revenue had assessed Quinco under section 245 (the “GAAR”) of the Income Tax Act (Canada) (“ITA”) to deny certain claimed capital losses.  Arrears interest on the resulting tax due was also assessed, which the Minister computed from Quinco’s “balance-due day”.  The “balance-due day” is the deadline by which a taxpayer is required to pay to the Receiver General certain amounts payable under the ITA for a particular taxation year.  For a corporate taxpayer, it is either two or three months after the end of the particular taxation year, depending on the circumstances.

Quinco took the position that it should not be liable for arrears interest on the assessed tax debt for the period prior to the assessment date.  It proffered numerous arguments to support its position. The most interesting argument was that, although a GAAR assessment requires a determination of the tax consequences reasonably necessary to deny the tax benefit, it does not permit or extend to the recharacterization of the transaction for any other tax purposes; therefore, a taxpayer’s liability for interest does not arise until the date of the reassessment.

Justice Bocock rejected this argument and explained that an assessment under the GAAR,

“whether alone or in conjunction with another technical omission or non-compliant act, is not an assessment divorced from the other provisions of the Act.”

Here, the assessment was raised utilizing the GAAR, but the assessment “insinuated itself into Part I of the Act to reassess the taxpayer otherwise in the normal course.”  Justice Bocock held that subsection 161(1) arrears interest accrues on any tax payable determined under the GAAR from the balance-due day until the GAAR assessment issuance date (and onwards until payment of the tax payable).

 

 

 

 

 

 

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Tax Residency of Trusts in Canada: Application of the Central Management and Control Test Post-Garron

Canadian and provincial income taxes are assessed on worldwide income on the basis of a taxpayer’s residence. Subsection 104(2) of the Income Tax Act (the “Tax Act”) provides that a trust is deemed to be an “individual” for purposes of the Tax Act. Consequently, trusts that are resident in Canada or deemed to be resident in Canada will be taxed on their worldwide income as opposed to only their Canadian source income. Despite the tax implications accompanying a taxpayer’s residency status, the Tax Act provides little in the way of guidance for determining the residency of a trust. As a result, Canadian courts have been tasked with making this determination.

Central Management and Control

In 2009, Garron Family Trust (Trustee of) v. R.[1] changed the long-standing approach to determining the residency of trusts in Canada.[2] The test set out in Garron provides that the residency of a trust is where the central management and control of the trust actually takes place.[3] The court clarified that the assessment into who has central management and control is a question of fact to be examined on a case by case basis. In concluding that the central management and control of the Summersby and Fundy trusts (the “S&F Trusts”) resided with the beneficiaries, the court considered several factors, including:

  • Whether the evidence or lack of evidence demonstrated an active or passive role taken by the trustee in its management of the trust;
  • The true controlling minds behind investment decisions and management of the S&F Trusts’ assets;
  • The use of a protector mechanism to exert control over the trustee;
  • The beneficiaries’ demonstrated interest in the trustee’s management of the S&F Trusts;
  • The trustee’s expertise in managing trusts; and
  • The trustee’s knowledge of the transactions it had been asked to approve.

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Stock Option Taxation Update

The newly elected federal Liberal government ran on the promise of several personal income tax reforms. The majority of the personal income tax reforms promised by the Liberals focus on addressing income inequality between high-income earners and the middle class – as evidenced by the proposed high-income tax bracket, the reduction in the Tax Free Savings Account contribution limit, the removal of family income splitting, and an over-haul of the current tax treatment of stock-options.

Currently, the rules relating to employee stock option taxation in Canada, generally provide for no tax payable at the time that options are granted and only result in the employee recognizing 50% of the benefit or gain arising from the exercise of the qualifying stock options issued by public companies. This amount is taxed in the year of such exercise. Stock options issued by a Canadian-controlled private company (CCPC), provided certain conditions are met, are eligible for a further benefit in that the tax payable by the employee is deferred until the employee disposes of the shares acquired through the stock option. The result is a “capital-gains” like tax treatment of the increase in the value of the shares. This treatment is implemented by way of a deduction from employment income rather than taxing the stock options as a capital gain.

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Federal Court of Canada dismisses challenge to CRA’s automated data collection and disclosure regime under FATCA

In a summary judgment released on September 16, 2015, the Federal Court of Canada examined and disposed of the non-constitutional arguments in the Hillis and Deegan case[1] generally finding that the automatic data collection and disclosure of taxpayer information to the United States by Canada pursuant to the Canada-U.S. Intergovernmental Agreement (IGA) is not inconsistent with the Canada – U.S. Tax Treaty (Tax Treaty) and does not otherwise violate the taxpayer confidentiality provisions in section 241 of the Income Tax Act (Canada) (ITA).

The plaintiffs had originally filed a claim seeking a declaration that the relevant provisions under the Canada – U.S. Tax Information Exchange Agreement Implementation Act (IGA Implementation Act) which implements the IGA are ultra vires or inoperative because the impugned provisions are unconstitutional or otherwise unjustifiably infringe Charter rights. An amended statement of claim was subsequently filed adding the non-constitutional arguments. The plaintiffs sought a permanent prohibitive injunction preventing the collection and automatic disclosure of taxpayer information to the United States by the CRA. A special sitting of the Court was scheduled so that the issues could be disposed of before taxpayer information was to be automatically sent pursuant to the IGA.

The Canadian government’s position was that the collection of taxpayer information is authorized by the IGA and that disclosure to the United States is not inconsistent with the Tax Treaty or in violation of section 241 of the ITA.

In its decision, the Federal Court endorsed the general reasoning and the legal arguments submitted by the government.

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