Reasoning in Sommerer Reaffirmed by FCA

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Reasoning in Sommerer Reaffirmed by FCA

Brent Kern Family Trust v Canada, 2014 FCA 230

The FCA upheld the reasoning that subsection  75(2) of the Income Tax Act  applies only to a settler or contributor and not where there is a fair market value disposition into the trust.

The FCA stated that future arguments on the basis that the decision in Canada v. Sommerer, 2012 FCA 207, is “manifestly wrong” for failure to consider the whole context of subsection 75(2) will not succeed at the FCA as there is no basis to make such a finding (Miller v. Canada (Attorney General) 2002 FCA 370 at para. 10.).

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De Jure versus De Facto Directors of Corporations

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De Jure versus De Facto Directors of Corporations

MacDonald v The Queen, 2014 TCC 308

The Appellant was assessed under the directors’ liability provisions of the Income Tax Act (Section 227.1) and Excise Tax Act (Section 323) to be liable for a corporations tax debts.

The Appellant argued that he never consented to be a director and never held himself out to be a director of the corporation, or in the alternative exercised due diligence, and therefore not liable for the corporation’s debts.

ANALYSIS

For the purpose of the directors’ liability provisions under the ITA and the ETA a “director” is either a de jure or a de facto director: Mosier v. R., [2001] G.S.T.C. 124.

De Jure Director

A de jure director is a person who has been appointed as a director under the appropriate corporate statute.  Therefore one must look to the governing corporate statute under which the corporation was created or continued.

The public registry of directors only creates a rebuttable presumption that a person so listed is de jure director.  This presumption may be overcome using evidence to the contrary, including evidence that the person never consented to be a director.

A person who was not aware they were a director and never consented to be a director is not a de jure director: Lau v. R., [2003] G.S.T.C. 1; Hay v. Canada, 2004 TCC 51.

In this case the person did not know he was a director and did not consent to act as a director.  Also, the corporate process required to appoint a director was not followed, and no resolution was passed.

De Factor Director

A de facto director may be either (I) a person who is ostensibly duly elected but lacks some qualification under the relevant corporate statute, or (ii) a person who simply assumed the role of director without any pretense of legal qualification.

The FCA in Wheeliker v. R., [1999] 2 C.T.C. 395, held that de facto directors may be liable even without a valid appointment.  But, de facto director findings are limited to persons who hold themselves out as directors: Scavuzzo v. R., [2005] G.S.T.C. 199.

Generally, it is not appropriate to assess a person as a de facto director where “there are legally appointed directors in office at the relevant time” (para 40), and should only be based on a person holding himself out as  director based on written evidence of such behaviour (para 40).

Where a person “did not believe he is a director and never thought he had any authority to advise, influence, or control the management or director of the company”, that person should not be considered a de facto director: Perricelli v. R., 2002 G.T.C. 244. Also, steps including “steps taken to satisfy the requirements of the Excise Tax Act such as the preparation of invoices, meeting with the auditor, hiring a lawyer and signing cheques were not in themselves acts of a director”: Hay v. Canada, 2004 TCC 51.  The role the person plays cannot be limited or inconsistent with that of a director: Mikloski v. R., 2004 TCC 253.

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Arrears Interest Calculation when GAAR Applied

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Arrears Interest Calculation when GAAR Applied

JK Read Engineering Ltd v The Queen, 2014 TCC 309

At issue was the calculation of arrears interest where the General Anti Avoidance Rule (GAAR) has been applied.   Specifically at issue was (1) the date at which the tax liability arises when GAAR is applied, and (2) when interest beings to accrue on that liability.

The taxpayer argued that subsection 245(7) of the Income Tax Act requires that the Minister first issue a Notice of Assessment based on the GAAR before the tax consequences of abusive avoidance transactions can be determined.  The tax liability, therefore, arises only on the date of the GAAR assessment.

The Minister argues that GAAR applies automatically and without the Minister’s actions, giving rise to the tax liability on the taxpayer’s balance due date.

The Court held that GAAR operates as a transaction is being carried out without the need for the Minister to Assess.

ANALYSIS

Justice Hogan reviewed the taxpayer’s and Minister’s positions.

The taxpayer argued that the SCC in Copthorne Holdings Ltd. v. The Queen,  2007 TCC 481, affirmed in 2009 FCA 163, affirmed in 2011 SCC 63, held that taxpayer’s cannot self-assess on the basis of GAAR because of subsection 245(7), and on this basis the tax liability only arises when the Minister assesses on the basis of GAAR.  Hogan J disagreed with this analysis, and stated that implicit in the SCC decision s that “GAAR operate[s] as the abusive transactions [are] being carried out, and not [...] when the GAAR-based assessment [is] issued by the Minister” (para 16).

The Court considered the proper interpretation of subsection 245(7) of the ITA, which reads:

Notwithstanding any other provision of this Act, the tax consequences to any person, following the application of this section, shall only be determined through a notice of assessment, reassessment, additional assessment or determination pursuant to subsection 152(1.11) involving the application of this section.

Justice Hogan noted that the decision of the SCC did not deal with the striking out of the penalty (the basis of the taxpayer’s no-self-assessment argument), and therefore could not be used to interpret the provision.  This reminds us of the importance of actually looking at what issues were before a court, and what part of the decision is the ratio and what parts are obiter (see para 22-24).   The SCC in  R. v. Henry, [2005] 3 S.C.R. 609, rejected the idea that the obiter of the SCC majority is binding on lower courts, and stated that having obiter bind lower courts is not desirable because:

. . . the effect would be to deprive the legal system of much creative thought on the part of counsel and judges in other courts in continuing to examine the operation of legal principles in different and perhaps novel contexts, and to inhibit or skew the growth of the common law.

. . . All obiter do not have, and are not intended to have, the same weight. The weight decreases as one moves from the dispositive ratio decidendi to a wider circle of analysis which is obviously intended for guidance and which should be accepted as authoritative. . . .

Justice Hogan also referred to the decision in S.T.B. Holdings Ltd. v. The Queen, 2002 DTC 1254, where it was held that an assessment issued under subsection 245(7) does not require specific reference to GAAR and does not prevent the use of GAAR as an alternative assessing tool.  The FCA, 2002 FCA 386, on appeal held, appeal to SCC dismissed, that 245(7) applies only to third party taxpayers affected by the assessment of a target taxpayer, and who are seeing an adjustment under 245(6).  Justice Miller in the decision quoted from the explanatory notes accompanying the enactment of GAAR:

New subsection 245(7) of the Act provides that a person may not rely on subsection 245(2) in order to determine his income, taxable income, or taxable income earned in Canada of, tax or other amount payable by, or amount refundable to, any person under the Act as well as any other amount under the Act which is relevant for the purposes of the computation of the foregoing, except through a request for adjustment under subsection 245(6). This prevents a person from using the provisions of subsection 245(2) in order to adjust his income, or any of the above-mentioned amounts without requesting that adjustment following the procedures set out in subsection 245(6). [emphasis added]

The Court held that GAAR application for determination of the tax liability of a taxpayer does not depend on the date of the Notice of Assessment (para 41), or that in the alternative it is retrospective in effect (para 42).

As for the arrears interest on the tax liability, the court held that the interest accrues from the taxpayer’s balance-due-date if there is tax payable outstanding at that time.   The FCA in The Queen v. Whent2000 DTC 6001 at para. 44,  held that “outstanding” refers to an amount “that stands over; that remains undetermined, unsettled, or unpaid”.  Also, the definition of “tax payable” in subsection 248(1) does not provide an exception for the application of GAAR.  Thus arrears interest begins to accrue from the balance due date.

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Reassessment vs Additional Assessment – Large Corporations

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Reassessment vs Additional Assessment – Large Corporations

Rio Tinto Alcan Inc v The Queen, 2014 TCC 288

At issue was whether the actions of the Minister were a “Reassessment” or an “Additional Assessment”, and the effect of each for a large corporation’s appeal/objection to the Minister’s view as to its tax liability.

The Crown argued that the actions it had taken were a reassessment and not an additional assessment.

The Court reviewed the decisions in Parent v Canada, [2003] TCJ No 445 (TCC), Walkem v MNR, 71 DTC 5288 (FC), and Mucien Remillard v The Queen, 2011 TCC 327.  The court also referred to two articles (C. Campbell, Administration of Income Tax 2013, cited by the Supreme Court of Canada in Revenue Agency v Environmental Services AES , [2013] 3 SCR 859 (2013) page 398; B. Russell, ” Assessments, Reassessments and Waivers, 2012 Tax Dispute Resolution Compliance and Administration “, Conference Report (Toronto: Canadian Tax Foundation, 2013) 26: 1-15; and D. Smith “Reassessments, Waivers, Amended Returns and Refunds” Corporate Management Tax Conference 1988, on page 8: 8).

The court held that the distinction between a reassessment and an additional assessment looks at whether there was an increase in the total taxable income of an assessment (indicating a reassessment) or not (an additional assessment).

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Waivers of Limitation Periods in the Income Tax Act

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Waivers of Limitation Periods in the Income Tax Act – Judicial Interpretations and Approaches

Abstract

The Income Tax Act sets various time limited on actions by the Minister and the Taxpayer. These time limits are there to promote a balance between the need for proper administration of the Act in relation to each taxpayer’s affairs and certainty/finality for both the taxpayer and the Minister. One of such time period is the “normal reassessment period” found in section 152. The Act allows for a taxpayer to waive the normal reassessment period, thereby allowing the Minister to reassess the taxpayer beyond this time period.

This paper examines waivers of the normal reassessment period in the context of the Income Tax Act, examines the judicial interpretation and application of such waivers, and provides guidance for judges faced with waiver issue

Get the article here: http://ssrn.com/abstract=2508048

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Income Tax (Federal & Provincial) – HST/GST – International Tax