What is a Charitable ‘Receipt’? – Sas Ansari

What is a Charitable Receipt?

Guobadia v The Queen, 2016 TCC 182

At issue was the definition of “receipt” for purposes of claiming a deduction for charitable donations made pursuant to section 118.1 of the Income Tax Act.  The Court held that an inflated receipt was not a “receipt” for purposes of s 118.1 of the ITA.

Subsection 118.1(1) provides for the deduction for a donation to a qualified charity, while paragraph 118.1(2)(a) required that a taxpayer must file a receipt for the gift that contains the prescribed information in Regulations 3501.  This prescribed information is mandatory and necessary to ensure that the indicated value is accurate and the gift was actually made (Afovia v. The Queen, 2012 TCC 391; Plante v. Canada, [1999] T.C.J. No. 51 at para 46).

The word “receipt” is not defined in the ITA, but the definition can be established by reading the word in its entire context and in its ordinary and grammatical sense – State Farm Mutual Auto Insurance Co. v. The Queen, [2003] T.C.J. No. 63; and Federated Co-Operatives Ltd. v. The Queen, [2000] T.C.J. No. 93; and Blondin v. Canada, [1994] T.C.J. No. 987 at paras 13-15.

The Court referred to the definition of “receipt” in a number of dictionaries and concluded that “a receipt is a written document delivered in exchange for the receipt of money, goods or services, reflecting the actual amount of money or the fair market value of the property or services received” (para 31).

A document cannot be accepted as a receipt where it “does not accurately reflect the money paid or the fair market value of the property or services actually provided in exchange” (para 32).  As such, an inflated receipt does not meet the definition of “receipt” for purposes of a charitable donation tax credit in the ITA. The Court referred to the Federal Court of Appeal decision in David v. Canada, 2015 FCA 225, but notes that the FCA did not determine whether an inflated donation receipt was a valid receipt.  That decision is compatible with a finding that an inflated receipt is not a receipt but a fiction.

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Extra-territorial Jurisdiction of the CRA – Sas Ansari

Extra-territorial Jurisdiction of the CRA

Oroville Reman & Reload Inc v Canada, 2016 TCC 75

At issue was whether Canada can issue a Notice of Assessment pursuant to the Softwood Lumber Products Export Charge Act, 2006, to a US company that has never engaged in or carried on business in Canada.

Though the specific question in this case is unlikely to be of general interest, the analysis of the jurisdiction of the CRA is.  Please see the NOTE at the end of this post.

ANALYSIS

The court identified three kinds of jurisdiction recognised in international law, each with its own set of pre-conditions:

  • Prescriptive – this is legislative of substantive jurisdiction that grants the power to make rules, issue commands, or grant authorizations that are binding;
  • Enforcement – the power to use coercive means to ensure that “rules are followed, commands are executed or entitlements are upheld” – in short, to give effects to its use of prescriptive jurisdiction; and
  • Adjudicative – the power of a state’s courts to resolve disputes and interpret the relevant law through issuance of binding decisions.

The Court had to determine what jurisdiction was exercised when the CRA sent correspondence to the Appellant. This is because the exercise of prescriptive jurisdiction can occur extraterritorially but the exercise of enforcement extraterritorially, in a foreign state, only with that state’s consent.

The court held that enforcement jurisdiction occurs right after prescriptive jurisdiction ends, which is where the enactment received royal assent. However, the court left for another day the question of the classification of the action of the CRA in issuing a Notice of Assessment was the exercise of enforcement jurisdiction. However, it appears that this Court, if required to decide the case, would have held that the issuance of a NOA would be the exercise of enforcement jurisdiction.

The Court went on to address the “presumption of conformity with international law” and “the presumption against extraterritoriality” – two cannons of statutory interpretation.  These two presumptions can, if breached, be displaced by a statute’s unequivocal intent to violate the presumptions (para 30).  The presumptions are:

  • Presumption of Conformity – the presumption that legislation will conform to international law, and therefore with the state’s international obligations, absent the statute clearly compelling the alternate result;
  • Presumption against extraterritoriality – the presumption that legislation is meant to have legal effect only within a state’s territory.

There are 5 grounds of jurisdiction: Territoriality, nationality, passive, protective, and universal.  The Court held that the only ground possible in this case was the territoriality principle which requires a “real and substantial link” between Canada and the activities giving rise to the claim for tax (para 38).  The relevant factors are set out in Society of Composers, Authors and Music Publishers of Canada v Canadian Assn of Internet Providers, 2004 SCC 45, in the context of the Copyright Act.

The Court considered the following factors as supporting a lack of a real and substantial link:

  • taxpayer was never registered or continued in any jurisdiction in Canada;
  • taxpayer has no facilities, assets, or operations in Canada;
  • taxpayer did not arrange for transportation of goods out of Canada;
  • the deposits, the refund of which engages the tax in question, were paid to the government of the USA

In this case, the presumption is breached, and the Court had to look at the statute to see whether the breach was authorized by the statute either expressly or by necessary implication.  This is a high bar – In Metcalfe v Yamaha Motor Powered Products Co2012 ABCA 240.  

The Court did not find that the intention of extraterritorial effect was “manifest” in the statute, or that the purpose of the statute would be frustrated if the provision was not given extraterritorial effect – Alberta Government Telephones v Canada (Canadian Radio-Television and Telecommunications Commission), [1989] 2 SCR 225.  The Court said (para 55):

It is my view that in order for tax legislation to have effect on a taxpayer, the government must bring the taxpayer’s conduct, and the taxpayer, within the four corners of the statute.

NOTE: The decision here relies, in part, on the historical presumption that taxing legislation be interpreted most stringently than other types of legislation. This approach to interpreting tax legislation has been called into question by various SCC decisions.  For more on the interpretation of tax legislation see HERE.

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Duties and Obligations of Taxpayers – Sas Ansari

Duties and Obligations of Taxpayers

Mallette v The Queen2016 TCC 27

What are the obligations of a taxpayer who is acting, purportedly, on professional advice but turns out to have been the victim of a fraud? [for an in-depth analysis of tax consequences for victims of fraud see HERE].

FACTS

The taxpayer claimed non-existent business expenses on the basis of fraudulent advice provided by Fiscal Arbitrators and Fireslander Financials.  The fraudsters prepared the taxpayer’s tax returns claiming large fictitious business losses.

The CRA reassessed the taxpayer and penalized him pursuant to 163(2) of the ITA.  The taxpayer appealed the application of gross negligence penalties.

ANALYSIS

 The Court identified the Canadian tax system as both “self-reporting and self-assessing”, relying on the honesty and integrity of taxpayers.  This system imposes on the taxpayer a duty to “report his taxable income completely, correctly and accurately no matter who prepares the return” (para 16, emphasis added).  Taxpayers must be vigilant in ensuring completeness and accuracy of the information in returns, and are solely responsible to the CRA – Northview Apartments Ltd. v. Canada (Attorney General), 2009 FC 74, at para 11.

The Supreme Court of Canada set out the responsibilities and duties of taxpayers in R. v. Jarvis, 2002 SCC 73, stating that:

  • taxpayers have an obligation to pay the tax on their taxable income according to the rules in the ITA;
  • taxpayers must estimate their annual income tax payable;
  • taxpayers must disclose their estimate to the CRA in their returns;
  • The ITA imposes penalties on person who fail to file their returns (s 162) or that fail to report the required amounts, or who are complicit or grossly negligent in making false statements or omissions (s 163); and
  • taxpayers must be forthright and honest in their reporting obligations.

The penalties are there to protect the integrity of the system and to encourage taxpayers to exercise care and accuracy in the preparation of their return no matter who prepares them (para 18). In order for gross negligence penalties under subsection 163(2) to apply, two elements must be established by the Crown:

  1. a false statement in the return; and
  2. knowledge of or gross negligence in the making of, participating in, assenting to, or acquiescing in the making of, that false statement.

There was no question so to false statements contained in the returns. The claims had no foundation in fact.

The taxpayer also reviewed his returns and knew that he didn’t have business expenditures of such magnitude. He knew that this information was simply not true. This is sufficient to impose gross negligence penalties.

Even if the taxpayer honestly believed in the legitimacy of the tax savings scheme, he still knew he had not incurred the magnitude of expenses claimed that year.  He never supplied the tax preparer with any information to allow for such a calculation and knew that this was a made-up number (para 22).  Even if the taxpayer didn’t “knowingly [make], participated in, assented to or acquiesced in the making of, such a false statements”, he is liable if he is grossly negligent.

Negligence is “the failure to use such case as a reasonably prudent and careful person would use under similar circumstances.  Gross negligence involved greater neglect reaching the level of intentional acting or indifference as to whether the law is complied with or not – Venne v. Canada, [1984] F.C.J. No. 314 (QL). In Farm Business Consultants Inc. v. Canada, [1994] T.C.J. No. 760 (QL).  The Court stated, at para 24:

… the words “gross negligence” in subsection 163(2) imply conduct characterized by so high a degree of negligence that it borders on recklessness. In such a case a court must, even in applying a civil standard of proof, scrutinize the evidence with great care and look for a higher degree of probability than would be expected where allegations of a less serious nature are sought to be established …

Gross negligence includes “wilful blindness” which involves a party who “has his suspicion aroused but then deliberately omits to make further inquiries, because he wishes to remain in ignorance ” – R. v. Hinchey, [1996] 3 S.C.R. 1128.  Thus, a person has become aware of the need for inquiry fails to make the inquiry because of the wish not to know the truth, preferring to stay ignorant.  The Federal Court of Appeal in Panini v. Canada, 2006 FCA 224 said (see also Canada v. Villeneuve, 2004 FCA 20):

43 . . . the law will impute knowledge to a taxpayer who, in circumstances that dictate or strongly suggest that an inquiry should be made with respect to his or her tax situation, refuses or fails to commence such an inquiry without proper justification.

In distinguishing between regular and gross negligence, the following factors must be considered, each factor weighed in context to see what the overall picture emerging is:

  • the magnitude of the omission in relation to the income declared;
  • the opportunity the taxpayer had to detect the error;
  • the taxpayer’s education and apparent intelligence;
  • genuine effort to comply.

See DeCosta v. The Queen, 2005 TCC 545, at paragraph 11; Bhatti v. The Queen, 2013 TCC 143, at paragraph 24; and McLeod v. The Queen, 2013 TCC 228, at paragraph 14 – In Torres v. The Queen, 2013 TCC 380, paragraph 65, the factors were non-exhaustively summarized:

a)         Knowledge of a false statement can be imputed by wilful blindness.

b)         The concept of wilful blindness can be applied to gross negligence penalties pursuant to subsection 163(2) of the Act . . . .

c)         In determining wilful blindness, consideration must be given to the education and experience of the taxpayer.

d)         To find wilful blindness there must be a need or a suspicion for an inquiry.

e)         Circumstances that would indicate a need for an inquiry prior to filing . . .  include the following:

i)          the magnitude of the advantage or omission;

ii)         the blatantness of the false statement and how readily detectable it is;

iii)        the lack of acknowledgment by the tax preparer who prepared the return in the return itself;

iv)        unusual requests made by the tax preparer;

v)         the tax preparer being previously unknown to the taxpayer;

vi)        incomprehensible explanations by the tax preparer;

vii)       whether others engaged the tax preparer or warned against doing so, or the taxpayer himself or herself expresses concern about telling others.

f)         The final requirement for wilful blindness is that the taxpayer makes no inquiry of the tax preparer to understand the return, nor makes any inquiry of a third party, nor the CRA itself.

The court identified the ‘red flags’ present as (para 33):

  • the fee structure being a percentage of refunds obtained and being exorbitant in respect of filling out a few forms;
  • the tax preparer was previously unknown to the taxpayer and he was not allowed to deal with the directly;
  • the tax preparer was not mainstream but managed to come up with an amazing tax savings scheme;
  • an internet search not producing negative information on the preparer is not the same as having information of legitimacy of the scheme;
  • the link of investments with tax return obtained is a strange relationship that should have caused the taxpayer to question the investment-savings scheme;
  • the tax savings scheme was specious and utterly preposterous, being the theory that a person can be separated from his SIN to create two separate entities for tax purposes;
  • the numbers were not based on any information provided by the taxpayer, raising the need to investigate how they were determined;
  • The tax advantage was significant and would have returned all taxes paid over the past years to him;
  • The return included blatantly false statements of fact and were easily detectable;
  • Unusual requests made by the tax preparer including:
    • using the word “per” before his signature on a personal return,
    • having to write his name in block letters,
    • statement of agent activities having to be in blue ink,
    • not providing CRA with his phone number,
    • not speaking directly to the CRA,
    • not filing electronically
    • not using direct deposit
    • forwarding all CRA correspondence to the preparer
  • The return not acknowledging that a tax preparer has prepared the return in box 490
  • The preparers address being in a strange format;
  • Failure to make inquiries of the CRA or other tax professionals

The court distinguished this case from others where taxpayers relied on professionals (Lavoie c. La Reine, 2015 CCI 228), or where honest mistakes or confusion resulted in the misstatement (Hine v. The Queen, 2012 TCC 295).  Taxpayers can not avoid penalties for gross negligence by putting blind faith in tax preparers without taking steps to verify the correctness of the information in their returns (Gingras v. Canada, [2000] T.C.J. No. 541 (QL); Laplante v. The Queen, 2008 TCC 335).  The taxpayer’s signature that the returns are truthful is an obligation not avoided by relying on tax professionals.

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Deducting Employment Expenses – Sas Ansari

Deducting Employment Expenses

Leith v The Queen, 2015 TCC 314

At issue was whether the taxpayer met the procedural and legal requirements enabling him to deduct employment expenses from his income.

The Income Tax Act prohibits the deduction of employment expenses from income other than those expressly permitted by section 8.

ANALYSIS

In order to be deductible, the taxpayer:

  1. must have a T2200 Declaration of Conditions of Employment form for certain expenses;
  2. must incur the expense for purposes of earning income from employment,;and
  3. must be permitted to deduct the amount by a provision in section 8.

Subsection 8(10) of the ITA limits the deductions allowed under subsection 8(1) paragraphs (c), (f), (h), and (h.1) and subparagraphs (i)(ii) and (iii).  For these expenses, the taxpayer needs the prescribed form (T2200) signed by the employer certifying that the conditions for the deduction has been met, and this form must be filed with the taxpayer’s return of income for the year.  The T2200 form states that it doesn’t have to be filed but must be kept in case the CRA asks for it.  This administrative practice seems at odds with the statutory requirement. owever, subsection 220(2.1) give the Minister the power to waive the requirement that a person file a prescribed form or document.  The form, therefore, has the effect of waiving the filing requirement as long as the form is provided upon request (para 7).

Here, the CRA assumed that the taxpayer did not incur the expenses in respect of employment activities. The Taxpayer failed to demolish the assumption. The evidence of the taxpayer was not credible, in part because he altered his T2200 and backdated his personal calendars.  The problem with the alterations, even if valid, is that it was not possible for the court to determine whether or not the changes were made before the document was certified or not.

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Tax Planning Gone Wrong (and how to avoid it) – Sas Ansari

Tax Planning Gone Wrong (and how to avoid it)

Golini v The Queen, 2016 TCC 174

What is the difference between “smoke and mirrors” and “structured transactions” in the tax world? How does a taxpayer ensure that s/he is on the correct end of the spectrum that divides that chasm?

Tax planning transactions must ensure that the wording in individual steps of the overall plan do not present the circumstances of the transaction to be other than the whole taken together.  Otherwise, the transactions are a sham and the words mere “smoke and mirrors”.   Even if most transactions are legally enforceable and presented in their legal reality, those that stretch legal reality to breaking doom a tax plan.

A sham allows the court to determine tax consequences on the basis of the real transactions, not the ‘legal’ ones hiding such a sham.

Sometimes tax planners tie themselves into a knot trying to get a no-tax outcome and, in doing so, go beyond legal reality. Ensure that all transactions part of the tax plan have a primary business purpose, reflect proper value, do what they purport to do, and are legally effective.

The case is lengthy but worth a deep read by tax planners.

FACTS

[please read the case to understand the lengthy facts, – they are not fully represented here]

The taxpayers, as part of estate and shareholder planning, engaged in a number of transactions on the advice of professional advisors.  Specifically , they engaged in a Retirement Compensation Arrangement though an estate freeze and an Optimizer Plan.  The Tax Court held that the taxpayers were guided by the professionals entirely (including the use of lenders, etc), and were not aware of what the professionals did in the background (including incorporating companies for the purpose of this transaction).

The plan involved:

  • S 85 roll-over into a new holdco;
  • a bridge loan from an offshore financial institution;
  • Redemption of shares using the bridge loan amounts;
  • purchase of an annuity linked to a life insurance policy (with a death benefit);
  • Provision of a limited recourse loan connected to the preceding transactions;
  • Use of limited recourse loan to subscribe for shares, with investment used to repay bridge loan;

The ultimate result was the creation of an interest deduction for Sr and a stepped up PUC for Jr.

The CRA took the position that either:

  • The transactions were a sham such that there was a failure to report a deemed dividend or benefit; or
  • There was a shareholder benefit to Sr; or
  • The transactions created a “tax shelter”; or
  • The carrying charges are unreasonable; or
  • GAAR applies to deny the tax benefit.

ANALYSIS

The Court did not hold the transactions to be a sham, but did find that they are subject to GAAR. However, there was no need to rely on GAAR as the ITA adequately covered these transactions.

There was a shareholder benefit to Sr. under 15(1).   The shareholder received immediate access to $6M tax-free with an obligation to only pay $40K guarantee fee and $80K in interest per year for 15 years. The corporation took on the obligation to repay the loan to the shareholder by assigning the annuity and insurance proceeds it purchased.  The facts in this case did not make the corporation’s actions a contingent assignment or a collateral guarantee (Alberta (Treasury Branches) v MNRToronto Dominion Bank v MNR, [1996] 1 SCR 963).

The Court, in reaching this conclusion took a bird’s eye view (para 94), and was not distracted by the specific wording in particular provisions of the various agreements. The court recognised that it could not ignore legal realities (Shell Canada Ltd v The Queen, [1999] 3 SCR 622), but stated that the documents make it clear that the loan would not have to be repaid – in determining whether there was a benefit to the shareholder, the court felt it was not to get hung up on distinctions between conditional or absolute assignment where the wording of the contracts does not contradict the bird’s eye view conclusion (para 96).  The court stated (para 98):

I grant the documents may be interpreted as not constituting an absolute assignment, but they can as readily be interpreted to do exactly what the parties intended, and that is to relieve Paul Sr. of his burden of repayment and have Holdco repay the loan with insurance proceeds – pure and simple. So while the documents may be written to avoid the interpretation of an absolute assignment, they’re equally written to ensure Paul Sr. does not have to repay the loan and therefore has an immediate benefit from the receipt of $6,000,000 used to acquire the Ontario Inc. shares. [emphasis added]

The court looked at the economic reality of a rational person entering into the overall series of transactions and was not distracted by the possibility of the taxpayer acting irrationally and against his self-interest in determining whether or not there was a benefit and what the value of the benefit to the shareholder was.

If this conclusion was wrong, the Court stated that the transactions would be a Sham – representing the transactions as something they are not. (for the law on sham see HERE at pp 26-28).  The documents misrepresented what was in effect an absolute assignment as one that was a contingent one. The court said that these transactions  abound with “Smoke and Mirrors” (para 107).  There were transactions that stretched legal reality to breaking (para 107).  Where there is a sham, the court can disregard the presented transaction and determine tax consequences by the real transaction hidden by the sham (para 109).  The taxpayer here, because of the knowledge of the overall transaction, knew the documents were not what they pretended to be (Mariano v The Queen, 2015 TCC 244).

Real transactions are legal ones, and not ones where what appears to be legal binding is undone by “nudging and winking”.  The sham here, making the legally contingent a real absolute, is the limitation of the recourse of the lender in case of default to the annuity and insurance proceeds due to the corporation.

The Court also comments on the applicability of GAAR, and finds that the underlying policy of s 84(1) was abused to obtain a tax benefit.

In conclusion, the court dismissed the appeal because the findings would result in an increase in tax liability beyond the CRA’s reassessment (something the court cannot do), and stated:

The Act is comprehensive: it has grown to be a mammoth tome attempting to cover every possible situation that taxpayers and their planners can concoct to minimize taxes – and concoct they do. Fearing plans were outwitting the legislation, the GAAR was introduced as an overriding general anti‑avoidance provision. This was not to deny a taxpayer’s right to arrange affairs to minimize taxes, but to ensure such was done within the spirit of the law, hopefully saving the need for several hundred more pages of legislation to cover off more and more complex plans. And the plans continued, in the Fisc’s eyes skirting with legitimacy, and thus the non‑legislative concept of sham got life. In these reasons I am simply attempting to make a common sense interpretation of the legislation without resort to the more nebulous concepts of sham or spirit of the law that admittedly can tie us all in knots. Subsection 15(1) of the Act taxes a shareholder benefit. I find Paul Sr. clearly benefitted as a shareholder both with respect to the $6,000,000 loan and the capitalized interest. But I also find he is entitled to deduct the cash portion of the interest.

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