Tax Cases : Tax tips
Principle of rectification
The Ontario Court of Appeal has confirmed in the Juliar case that the principle of rectification, obtaining a court order to retroactively correct a written agreement that does not properly record what the parties had intended, is applicable to transactions with Canadian Income Tax implications.
Deduction on the advice of a physician
The Tax Court of Canada held in a recent case that part of the cost of installing hardwood floors as required for the health of a severely asthmatic child on the advice of a physician are deductible for Canadian Income Taxation purposes.
Tax inquiry for determination of a penal liability
The Supreme Court of Canada held in the Jarvis decision that where the purpose of a tax inquiry is the determination of a penal liability, CRA auditors must warn the taxpayer in order to avoid infringing the Canadian Charter of Rights.
Limitation Periods
The Supreme Court of Canada has decided in the Markevich decision that CRA can’t collect funds owing to it if has failed to take enforcement action within the times set out in provincial and federal limitation periods. The Income TAx Act was amended as a result of this case.
Payment of GST
In Airport Auto (2003 GTC 899-105), CRA (the Canadian Income Tax Agency) attempted to force a purchaser to pay GST again after the vendor did not remit the tax. The court dismissed CRA’s argument and held that, based on simple agency law, the payment of the tax to a vendor as the Crown’s agent extinguishes the payer’s liability to pay the tax in the absence of fraud or collusion or explicit statutory language to the contrary; any other outcome would be “ludicrous.”
Disputes regarding whether source deductions were withheld on Behalf of a taxpayer
In the case of Boucher v. The Queen, 2004 FCA 47, the Federal Court of Appeal held that disputes regarding whether source deductions were withheld on behalf of a taxpayer need to be adjudicated in the Federal Court of Canada rather than the Tax Court.
Penalties can be applied for unreported income
In the case of Boucher v. The Queen, 2004 FCA 47, the Federal Court of Appeal held that penalties can be applied for unreported income even if the unreported income is offset by losses of previous years.
Where interest is not a payment “on account of capital”
In Gifford v The Queen 2004 SCC 15 the Supreme Court of Canada ruled that in circumstances where interest is not a payment “on account of capital”, it may be deducted as long as it meets the other requirements for deductibility set out in the Canadian Income Tax Act and the deduction is not precluded by some other section of the Act.
CRA had priority over the interest of a secured creditor
In the recent Federal Court Trial Division case of MNR v. HSBC BANK OF CANADA 2004 FC 467 the court held that CRA (the Canadian income tax department) had priority over the interest of a secured creditor that realized on its security at the time that a tax debtor owed source deductions.
Individual is entitled to a loss deduction for a previously unreported loss
In the recent Tax Court of Canada case of Burleigh (2004 TCC 197), the TCC said that an individual’s loss that was not reported in his income tax return in the year incurred was deductible in a later year. Therefore an individual is entitled to a loss deduction for a previously unreported loss, subject to carryover time limitations.
Standard of review to be applied by Appellate Courts in reviewing decisions of the Tax Court of Canada
The Supreme Court of Canada has established the standard of review to be applied by Appellate Courts in reviewing decisions of the Tax Court of Canada. For questions of law, the standard is correctness while for findings of fact, inferences or conclusions of fact and conclusions of mixed fact and law, the standard is palpable and overriding error. There is, however, an exception in regard to conclusions of mixed fact and law. If a clear legal error can be isolated from the facts, the error will be reviewed on a correctness standard.
Full- time employment and active business
In the Tax Court of Canada decision of Baker et al v The Queen 2004 TCC 375 the judge ruled that employees who work four hours per day, five days per week were not engaged in full- time employment, and that as a result their corporate employer did not carry on an active business for Canadian Income Taxation purposes.
Dual resident
The Federal Court of Appeal ruled in the case of Allchin v. H.M.Q. that a Canadian citizen with a US Green Card who lived in Canada and worked in the US and filed tax returns in the US on her worldwide income might be a dual resident and be subject to the residence provisions of the Canada-US Income Tax Treaty.
Acquired at a wholesale price and then donated to a charity for their retail value
In the October 2004 case of Quinn v The Queen, 2004 TCC 64, the Tax Court of Canada ruled that the taxpayer was entitled to a Canadian income tax credit for art prints acquired at a wholesale price and then donated to a charity for their retail value.
Dismissal of tax evasion charges
The British Columbia Supreme Court upheld the dismissal of tax evasion charges due to problems with document disclosure by the prosecution in the October 2004 decision of Regina, v. Jeffrey Robert Wilson and Christopher David Wilson, 2004 BCSC 1220.
De Facto control
In the Canadian income tax case of 9044-2807 Québec Inc. v The Queen, 2004 FCA 23, the Federal Court of Appeal held that corporations were associated under subsection 256(5.1) of the Income Tax Act by virtue of de facto control based on the controlling influence of one corporation on the other.
Lump sum settlement from an insurance company
The Supreme Court of Canada ruled in the case of Vasiliki Tsiaprailis v. Her Majesty the Queen that a lump sum settlement from an insurance company that represents disability benefits that would have been taxable for Canadian income taxation purposes when received remains taxable when received as a lump sum.
Recaptured capital cost allowance
In the case of GUSTAVE MERCURE ESTATE, the Tax Court of Canada held that recaptured capital cost allowance (tax depreciation) cannot be included in a separate “rights and things” Canadian income tax return of a deceased taxpayer.
Court allowed the taxpayer to deduct salary to children
In the recent Tax Court of Canada income tax case of April v The Queen the court allowed the taxpayer to deduct $7,000 in expenses paid to his 11 and 13 year old sons. The taxpayer testified as the exact duties performed by each son, including the number of hours worked. He also testified that he paid his sons in kind rather than by way of cheque.
The CRA has priority over other creditors for collected but unremitted GST
In the case of Ottawa Senators Hockey Club, 73 OR (3d) 737, the Ontario Court of Appeal decided that the Canada Revenue Agency has priority over other creditors for collected but unremitted GST, but not for penalties and interest on GST or unremitted payroll deductions for income tax, CPP or EI.
Anti Surplus Stripping rules in section 84.1 are not applicable where the buyer corporation and the seller have separate economic interests
The Tax Court held in the decision of Brouillette v. The Queen, 2005 DTC 1004, that the anti surplus stripping rules in section 84.1 are not applicable where the buyer corporation and the seller have separate economic interests, and they carry out a purchase and sale in accordance with those separate interests, effectively overruling the position of the Canada Revenue Agency in Technical Interpretation 2002-0166655.
Concept of de facto director is of very limited application: The Tax Court of Canada
The Tax Court of Canada confirmed in the recent case of Scavuzzo et al v The Queen 2005 TCC 772, that dealt with director liability for unremitted GST and payroll source deductions, that the concept of de facto director is of very limited application.
Income tax liability on income earned during the year prior to the making of a proposal under the Bankruptcy and Insolvency Act
The Tax Court of Canada decided in the case of JACQUES MARCHESSAULT v. HER MAJESTY THE QUEEN that the Canadian income tax liability on income earned during the year prior to the making of a proposal under the Bankruptcy and Insolvency Act is subject to the terms of the proposal and the income tax would therefore not have to be fully paid.
Reverse onus did not apply to facts assumed by the minister subsequent to the expiration of the reassessment period
In the Canadian Income Tax decision Anchor Pointe Energy Ltd. (2006 TCC 424), the Tax Court of Canada concluded that the reverse onus (that requires the taxpayer to disprove Canada Revenue Agency’s assumed facts) did not apply to facts assumed by the minister subsequent to the expiration of the reassessment period. The court concluded that the normal-course rules relating to the reverse onus of proof do not apply where the Minister of Revenue first raises the factual assumptions at the confirmation stage. The Minister has the onus of proof for such assumptions of fact.
GAAR applied to deny partnership asset rollover
In Ceco Operations Ltd. (2006 TCC 256), the Tax Court of Canada applied the general anti avoidance rule (GAAR) to a partnership asset rollover. A sale of a business contemplated two years before the transactions was structured via a partnership with the purchaser in 1998. Ceco rolled business assets to the partnership under subsection 97(2) for cash and a partnership interest. The purchaser injected cash equal to the value of Ceco's partnership interest and the partnership used the cash to invest in preferred shares of a company; that company and Ceco were owned indirectly by the same holding companies. The court said that the series of transactions was a patent abuse of subsection 97(2) and that GAAR applied to deny the partnership asset rollover.
Mailing address is the only one authorized and adopted for mailing purposes
In 236130 British Columbia v. The Queen, the Federal Court of Appeal upheld the Tax Court’s decision that a reassessment was not properly issued where it was mailed to the taxpayer’s books and records address, rather than mailing address, on the basis that the mailing address is the only one authorized and adopted for mailing purposes. Therefore, the Court concluded that the reassessment had not been issued at all.
Investment tax credits from a statute-barred year
In the income tax case of Papiers Cascades Cabano Inc. v The Queen the Federal Court of Appeal ruled that the Canada Revenue Agency (the Canadian income tax department) can adjust the balance of a carry-forward of investment tax credits from a statute-barred year.
Split up of a corporation by shareholders did not violate the anti-surplus stripping provisions
In the Canadian income tax case of McMullen v. The Queen, 2007 TCC 16, the decision of the Tax Court of Canada was that a split up of a corporation by two shareholders did not violate the anti-surplus stripping provisions found in subsections 84(2) and 84.1(1) of the Canadian Income Tax Act, and was not caught by GAAR (the general anti-avoidance rule).
Tax Shelter ID Number
The Federal Court of Appeal just allowed the appeal by the Canada Revenue Agency (the Canadian income tax department) in the case of Baxter v. The Queen, and held that the taxpayer had acquired a tax shelter. Since the promoter of the investment did not have a tax shelter ID number, all deductions were denied to Mr. Baxter.
Sentenced to Imprisonment, for failing to file his personal income tax returns
John Alexander McCullough was sentenced to imprisonment by the British Columbia Provincial Court in March 2007 for failing to comply with an order to file his personal income tax returns. He had a previous history of failure to comply and failing to pay his fines.
Acquitted for due diligence
In the case of The Queen v MacLean [2007] B.C.J. No. 1844, the taxpayer who was the executrix of her mother’s estate was acquitted of charges of failing to file returns for her late mother on the basis that she exercised due diligence in relying on advice of a lawyer, bookkeeper and accountant.
Interest Relief
In the recent Federal Court of Canada decision in Telfer v. CRA, 2008 FC 218, the Court granted the taxpayer’s application and said that she was entitled to a relief of 50% of the interest charged. CRA held the Notices of Objection of the taxpayer in abeyance pending the outcome of a tax shelter case in the Tax Court of Canada. Based on the test case the taxpayer accepted a settlement offer from CRA. The taxpayer requested interest relief which was refused by CRA.
Income Tax Evasion
In the Manitoba Court of Appeal case of Therrien v The Queen the application for leave to appeal summary convictions for Canadian income tax evasion and the making of false or deceptive statements in tax returns, together with the sentence imposed in the amount of a fine of $50,000, was denied.