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Aboriginal Peoples

Exemption from taxation

Taxpayer did not qualify for exemption with respect to bonuses

Taxpayer and her spouse owned and operated construction company. During relevant period, taxpayer was status Indian and was entitled to tax exemption under Indian Act (Can.) in respect of personal property situation on reserve. Her spouse was not, and was not entitled to tax exemption. Construction company employed up to 50 individuals on various construction sites, and almost none of sites were located on reserves. Spouse worked on construction sites and taxpayer worked in company office which was located on reserve. Company paid regular remuneration to taxpayer and spouse and paid balance of its annual income to taxpayer in form of year end bonuses. For income purposes, company claimed deductions for regular pay and bonuses and these deductions were allowed by Minister. Taxpayer claimed tax exemptions with respect to her regular pay and bonuses and Minister allowed exemption with respect to regular pay and disallowed exemption with respect to bonuses. Taxpayer appealed. Taxpayer did not qualify for exemption with respect to bonuses. Appeal allowed only with respect to issues agreed between parties. For purposes of appeal property at issue was remuneration from employment. Taxpayer already received adequate compensation for her employment in form of biweekly pay. Bonuses were not entitlement from reserve land by virtue of taxpayer’s employment because there was no substantive connection between land and bonuses. It was abusive of exemption to allow taxpayer to receive bonuses exceeding reasonable remuneration. Company undertook transaction having appearance of strong connection between bonuses and employment. In reality, there was no substantive connection. There was no evidence to support that bonuses were reasonable remuneration or that bonuses were intended by parties to reasonably compensate taxpayer for her duties of employment. Taxpayer received remuneration through her bi-weekly pay that was roughly equivalent to spouse’s remuneration except for 2008 when her pay exceeded that of her spouse. In order for bonuses to be reasonable, taxpayer should have made greater contribution to company than her spouse but evidence did not support this. Taxpayer played administrative role with respect to construction contracts with limited exceptions. Taxpayer’s employment was not strong connecting factor for bonuses. It was not abusive to move company’s office to reserve. Office was substantial and Minister’s argument in this regard attempted to read business purpose test into Act exemption.
Bell v. R. (July 27, 2016, T.C.C. [General Procedure], Judith Woods J., 2013-1806(IT)G) 268 A.C.W.S. (3d) 701.


Social Welfare

Old Age Security

Amount referred back to tribunal to determine Guaranteed Income Supplement eligibility

Minister determined taxpayer’s income for purposes of determining his eligibility under Old Age Security Act (Can.) to Guaranteed Income Supplement (GIS), assessing his Italian pension income and including his wife’s social assistance payments from Italy. Taxpayer appealed. Social Security Tribunal referred question of taxpayer’s income for 2010-2012 to Tax Court of Canada. Appeal allowed in part, only to extent of Minister’s concession on 2012 income. Taxpayer presented documents from Italy indicating his pension income was slightly less than amount relied upon by Minister, which was also derived from Italian report from same institution. As amount would make little, if any, difference to taxpayer’s entitlement to GIS, there was no need to change Minister’s determination. Taxpayer’s income for purpose of GIS entitlement was based on his and wife’s income, calculated in accordance with Income Tax Act (Can.) (ITA) subject to exceptions for social assistance payment from charity or federal or provincial program which did not include foreign social assistance. Section 56(1) of ITA specified that social assistance payments based on means, needs or income, including from foreign source, were to be included in income as were payments under foreign retirement arrangements unless they were not subject to tax in that country. As wife’s evidence that payments she received were not subject to tax in Italy was accepted, issue was whether they “foreign retirement arrangement” as contemplated by s. 56(1)(a)(i)(C.1) of ITA such that it would not be included in income. Wife effectively answered this question by describing difference between taxpayer’s pension which he had contributed to compared to her means or income-based social assistance payment. Wife’s description of payment exactly matched description in s. 56(u) of ITA as social assistance payment made on basis of means, needs, or income test, rather than as retirement arrangement, so payments were to be included in determining taxpayer’s GIS entitlement. Minister indicated that wife’s income had been incorrectly determined for one year at $8,053 when it was in fact only $6,711. Minister’s income determinations for 2010 and 2011 were accepted and determination for 2012 would be altered to reflect decrease, leading combined income of $15,950.29 for that year. Amount referred back to tribunal for purposes of determining GIS eligibility. 

Fang v. R. (July 5, 2016, T.C.C., Campbell J. Miller J., 2016-398(OAS)) 268 A.C.W.S. (3d) 233.



Taxation

Goods and Services Tax

Registrant was required to pay Goods and Services Tax on annual resort fee

Canadian Developer created registrant CI to facilitate administration of vacation homes in resorts in Canada, US and Mexico as part of vacation home ownership program. Canadian Developer transferred its interests in Canadian vacation homes, and US Developer transferred its interests in vacation homes in US and Mexico, to registrant pursuant to bare trust agreements in consideration of occupancy rights. Developers sold resort points for right to occupy time in vacation homes to point purchasers. Members of registrant, including point purchasers and Developers, paid annual resort fee to registrant, which funded annual costs of registrant, and included vacation home operating costs, costs of operating program, and corporate costs of registrant. Registrant billed point purchaser annually for full amount and developers monthly for portion of fee. Minister of National Revenue assessed registrant in respect of its monthly reporting period for October for each year from 2002 to 2007 on basis that annual resort fee was subject to Goods and Services Tax (GST) as consideration for taxable supply of intangible personal property. Registrant appealed. Appeal dismissed. Registrant was required to pay GST on annual resort fee. There was no agency relationship between registrant and each member in respect of vacation homes expenses. Annual resort fee was paid as consideration for supply of service rendered by registrant to members as registrant agreed to use funds to pay operation costs. Registrant made single supply of services that related directly or indirectly to real property situated outside of Canada, real property situated in Canada, and things other than real property such as operating costs. Since single supply made by registrant related at least partly to things other than real property, place of supply of service was deemed, under ss. 142(1)(g) and 142(2)(g) of Excise Tax Act (Can.), to be made in Canada since registrant performed annual services partially in Canada. GST applied to all of annual resort fee paid by members. Amount assessed by Minister was less than what should have been assessed given that registrant’s net tax for each October included GST on full amount of annual resort fee payable by purchasers who owned resort points on September 30 and GST on one-twelfth of annual resort fee payable by Developers. Canada Revenue Agency used method to determine registrant’s net tax for its October reporting periods that was not consistent with definition of net tax in s. 225(1) of Act and did not comply with ss. 152 and 168 of Act.
Club Intrawest v. R. (June 9, 2016, T.C.C. [General Procedure], Steven K. D’Arcy J., 2012-3401(GST)G) 267 A.C.W.S. (3d) 473.


Taxation

Income tax

Facts did not support allegations of fraud on court

Taxpayer was lawyer at litigation counsel until mid-2007. Taxpayer’s initial appeal was part of appeals involving 25 to 30 taxpayers represented by litigation counsel, and concerned taxpayer’s 2005-07 taxation years regarding deductibility of certain capital cost allowance in respect of purchased software licence. Taxpayer was reassessed in 2009 and his claimed capital cost allowance was disallowed; appeals were filed shortly after. For three years taxpayer had no communication with litigation counsel silent period, which ended when taxpayer received email from litigation counsel advising initial appeal was settled. Taxpayer sought to set aside minutes of settlement and prevent filing of notice of discontinuance (rescission period). Following receipt of advice by court that appeal was discontinued, taxpayer filed supplementary appeal. Taxpayer brought motion to set aside notice of discontinuance and to reinstate initial appeal; minister brought motion to dismiss appeals and that supplementary appeal was otherwise resolved and dismissed by Court. Taxpayer’s motion dismissed; minister’s motion granted. Initial appeal was dismissed in 2013, and supplementary appeal was dismissed on basis that substantive issues under appeal were resolved pursuant to s. 169(3) of Income Tax Act (Can.) and all rights of appeal from consequent reassessment were irrevocably waived under s. 169(2.2). Facts did not support allegations of fraud on Court at time of filing of discontinuance, recklessness in respect of truth or knowledgeable misrepresentation. Legal logic and common sense were followed by minister’s counsel; his analysis did not ignore or misrepresent attempted post-reassessment rescission by taxpayer or litigation counsel. Even if Court were to find such logic faulty, error did not constitute fraud. Post-facto and untimely disavowal by single taxpayer, entirely caused by omission of litigation counsel, and subsequent advice of same to minister’s counsel, could not revoke, rescind or avoid pre-existing settlement reflected in minutes of settlement and discontinuance and fully performed by notices of reassessment. No one was aware of lack of authority granted by taxpayer to litigation counsel to settle appeal until after execution of minutes and, most importantly, consequential issuance of notices of reassessment to 25 taxpayers. There was no evidence that minister’s counsel had any knowledge whatsoever of lack of authority until after all documents, actions and conditions subsequent were effected and concluded, otherwise entirely in accordance with terms of minutes and related documents.
Davies v. R. (April 27, 2016, T.C.C. [General Procedure], Randall S. Bocock J., 2010-3571(IT)G, 2014-2450(IT)G) 265 A.C.W.S. (3d) 811.


Taxation

Income tax

Shares of corporation were not shares of “eligible corporation” and did not qualify as investment for registered retirement savings plans

Taxpayer agreed to purchase 150,000 class B shares of corporation for $1.00 each Taxpayer opened RRSP account and transferred amount of $117,139.00 to that account Taxpayer directed RRSP to purchase 117,000 shares at $1 per share for total purchase price of $117,000 for her RRSP account. Corporation’s only activities in 2001 were purported purchase of Barbadian corporation’s shares and purchase of $200,000 in marketable securities, and only activities in 2002 were purported purchase and disposition of Barbadian corporation’s shares, and purchase of other long term investments. Minister reassessed taxpayer under Income Tax Act (Can.), finding RRSP investment was not qualified investment and including $117,000.00 in taxpayer’s income. Taxpayer appealed. Appeal dismissed. Class B shares of corporation were not qualified investment. Corporation had 91 per cent of its assets invested in shares of Barbadian corporation which was not related eligible corporation. Taxpayer did not show that fair market value of shares issued from treasury was less than what she agreed to pay for. Taxpayer recognized that she did not conduct any due diligence concerning corporation and she did not recall consulting investment advisor concerning investment. Documents showed that taxpayer’s RRSP acquired shares although exact date of acquisition was subject of disagreement -- Shares of corporation were not shares of “eligible corporation” within meaning of s. 5100(1) of Income Tax Regulations (Can.). Shares of Barbadian company represented over 93 per cent of corporation’s assets. Principal purpose of the business carried on by corporation in Canada was to derive income from property or from deriving gains from disposition of property, so that it did not use all or substantially all of its property in “qualifying active business.” As Barbadian corporation was incorporated under laws of Barbados, received International Business Licence from government of Barbados and filed its tax returns for the 2001 and 2002 taxation years reporting that it was resident of Barbados, it was not “Canadian corporation” and, therefore, was not “eligible corporation”, as defined in s. 5100(1) of Regulations, and its shares were not shares of related eligible corporation. Class B shares were not qualified investment pursuant to s. 4900(12) of Regulations as they were not shares of small business corporation. Business carried on by corporation was “specified investment business”, principal purpose of which was to derive income from property without having more than five full-time employees. Determination of whether particular investment is qualified investment for RRSPs is complex and perilous exercise out of reach for vast majority of Canadian taxpayers Impossible for taxpayer to make determination at time of acquisition of shares due to lack of information available.
Chiasson v. R. (Apr. 21, 2016, T.C.C. [Informal Procedure], Réal Favreau J., 2014-3217(IT)I) 265 A.C.W.S. (3d) 259.


Employment Insurance

Entitlement

That parties agreed to characterize contract as contract for services was not determinative of nature of contract

Insurance company hired individual as agent under Agent Contract in April 2012 and was terminated in November 2012. Company issued 2012 T4A in name of individual, reporting amount of $7,084.91 in self-employed commissions. In 2012 income tax return, individual declared gross commission income from self-employment of $7,084, and reported he incurred $7,098 in expenses to earn this income; individual declared net loss of $14. Individual appealed decision of Minister finding that he did not hold insurable employment. Appeal allowed. Individual was considered employee under art. 2085 of Civil Code of Quebec and held insurable employment. Fact that parties agreed to characterize contract as contract for services was not determinative of nature of contract. First, this was contract of adhesion; individual did not have opportunity to discuss whether he wanted to be independent contractor or employee. Second, individual was in vulnerable position given that he had been unemployed for several months at hiring. There was higher level of micromanagement than one would expect from most employers. Individual felt compelled to justify his absence from office; individual’s business card showed no indication that he was independent contractor or agent; any ordinary person would assume individual was employee of company. Individual did not represent several insurance companies, although company claimed he was free to do so; this was red herring. Company told agents how they should behave on internet, how to talk to people, how to dress to meet potential clients, what kind of pen to use for signing applications, how to deal with objections face to face and on phone, how to conclude sale, how to develop relationship over year, and when to send birthday cards. Company exercised control over every aspect of agents’ work and corrected mistakes when any were found. Fact that individual paid weekly rent of $18 for use of computer was red herring; fact that agents were given large degree of autonomy in performing their duties was normal. Company executives were not just coaches; they were there to supervise, assist, and give direction. It was obvious from testimony of company witnesses that they knew they were not supposed to say agents were being supervised, that meetings were mandatory, and that agents were not free to do whatever they wished. Evidence showed company had power of direction and control over agents who hired assistant. Code did not expressly preclude employee from employing assistant or that someone who would otherwise be employee could not be one because he hired assistant.
Mazraani v. Minister of National Revenue (Apr. 12, 2016, T.C.C. [Employment Insurance], Pierre Archambault J., 2013-3484(EI)) 264 A.C.W.S. (3d) 1078.


Taxation

Income tax

Imposition of gross negligence penalty upheld on appeal

As result of introduction from his long-time friend, taxpayer had Fiscal Arbitrators organization prepare his 2009 tax return in such way as to claim very large fictitious business losses, which would result in refund of taxes for 2006 through 2009 taxation years. Canada Revenue Agency (CRA) disallowed losses and imposed gross negligence penalty pursuant to s. 163(2) of Income Tax Act (Can.). Taxpayer appealed imposition of penalties. Appeal dismissed. Taxpayer’s 2009 tax return contained false statements, as he never owned or operated business. Taxpayer did not knowingly make false statements since he was not aware of what was in his return. Taxpayer did make, or participate in, assent to, or acquiesce in making of, false statements amounting to gross negligence. Taxpayer was not so lacking in education, intelligence or experience as to claim ignorance. There were ample warning signs that should have aroused taxpayer’s suspicions, such as not knowing organization, paying exorbitant fee to organization, lack of explanations by organization regarding preparation of return, and large magnitude of refund. False statements were blatant and readily detectable, had taxpayer looked at return. Taxpayer did not make genuine effort to comply with law or to respond to CRA’s letters. Taxpayer chose to remain blissfully ignorant and place his complete trust in organization, which amounted to wilful blindness.
Daszkiewicz v. R. (Feb. 12, 2016, T.C.C. [General Procedure], Rommel G. Masse D.J., 2013-492(IT)G) 263 A.C.W.S. (3d) 527.


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