Category Archives: 116

Sham Doctrine as Taxpayer Defence – Sas Ansari

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Sham Doctrine as Taxpayer Defence 

Coast Capital Savings Credit Union v The Queen, 2016 FCA 181

One issue in this appeal (from 2015 TCC 195) to the Federal Court of Appeal was whether a taxpayer could employ the sham doctrine as a defence to an assessment by the Minister.

FACTS

Cost Capital, a BC credit union, was the trustee of a number of trusts that were self-directed RRSPs or RRIFs.

The Minister asserted that Cost Capital, as trustee, used funds to purchase taxable Canadian Property from non-residents, did not take any steps to verify the residency of the vendor, and therefore was liable under subsection 116(5) of the  Income Tax Act.

Cost Capital took the position that it was not the purchaser of the shares (argument foreclosed by Olympia Trust Company v. Canada, 2015 FCA 279), that it did not acquire taxable Canadian property from non-residents, and did not appreciate it was dealing with a non-resident when purchasing the shares.

In defence, Cost Capital, who was not involved in the scheme nor had knowledge of its fraudulent nature, but claims to have been misled as to the true nature of the scheme, asked the TCC to recharacterize the transaction as it was a sham.

The TCC held that a sham can only be found in the tax context when the Minister, not a taxpayer, is deceived as to the true nature of the transaction (2529-1915 Québec Inc. v. Canada, 2008 FCA 398Bonavia v. Canada, 2010 FCA 129); that the taxpayer whose appeal was before the TCC had to be a party to the sham; and there was no evidence that Cost Capital’s legal rights and obligations created were other than intended (the funds were used to purchase the shares in question).

ANALYSIS

The Federal Court of Appeal expressed considerable doubt about the possibility that anyone other than the Minister can plead the sham doctrine (para 21), but did not need to address this or whether the taxpayer must necessarily be a party to the sham for the doctrine to be invoked (para 22), as in this case the taxpayer’s legal rights and obligations were none other than those intended (para 22).

Here, Cost Capital, as trustee, used trust funds to purchase shares of a Canadian Controlled Corporation that were taxable Canadian property from a non-resident person but did not withhold 25% of the purchase price as required.  Under subsection 116(5), the purchaser is liable for the 25% that would have been withheld.  The Taxpayer was being assessed “for its purchase of the shares from a non-resident and not for its mistaken belief as to how much they were worth or for what happened, unbeknownst to it, after the shares were purchased” (para 24).  Thus, deception as to the value of the shares or the ultimate destination of the funds are irrelevant to the issues. The Taxpayer acquired the shares for the agreed-upon purchase price, intended to release funds from a trust fund, and received the shares acquired – they “intended exactly what occurred” (para 25).

A Taxpayer is not relieved of their tax obligations where it makes a mistake or is the victim of fraud (Vankerk v. Canada, 2006 FCA 96 at para. 3).

For more on tax consequences of victims of fraud see HERE.

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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Trustee as Legal Owner’s Withholding Responsibility s 116(5)

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Trustee as Legal Owner’s Withholding Responsibility under s 116(5)

Olympia Trust Company v The Queen, 2014 TCC 372

At issue was whether the trustee of self-directed RRSP’s is a purchaser of shares under subsection 116(5) of the ITA, requiring the trustee to either obtain a clearance certificate under section 116 or to withhold and remit the statutorily prescribed amount when shares are purchased from a non-resident vendor.

The court held that the trustee is, for purposes of section 116, the purchaser who acquires property, and is charged by that section with withholding and remitting or, absent a clearance certificate, being vicariously liable for the non-resident sellers tax payable.

ANALYSIS

The court reviewed the relevant provisions of the ITA, being:

  • The non-resident liability to tax on dispositions of taxable Canadian property – s 116(3)
  • The purchasers obligation, when purchasing taxable Canadian property from a non-resident, to withhold and remit the non-resident’s tax liability (116(5)), unless a clearance has been issued by the MNR under 116(4);
  • The definition of a trust – 104(1);
  • The joint and several, or solidary, liability along with the trust of the legal representative for amount payable under the ITA – 159(1);
  • The obligation on the legal representative to obtain a clearance certificate from the MNR before distributing property of a trust – s 215(2);
  • The personal liability of the legal representative for the amounts due under the ITA if no clearance certificate is obtained – s 215(3);
  • The definition of “disposition” to include a transfer of property to a trust – 248(1); and
  • The definition of “retirement savings plan” – 146(1).

 The court noted that with an RRSP plan is  a trust, the trustee is seized of the power to manage and dispose.  The rights of enjoyment are vested in the beneficiary annuitant.   Here, Olympia is legally seized, has title, and has control over the trust property.

For ITA purposes, subsection 104(1) is a supplementary and expansive definition of trust, and not a codification, as no definition of trust exists in the ITA Fraser v The Queen, 91 DTC 5123 at page 5127 as affirmed 95 DTC 5685 (FCA).  However, under the RRSP regime the annuitant has not right to the specific trust assets in specie but only to the wealth value of the assets once converted to cash (para 28).

Thus, the court concluded, that the non-resident disposed title of the shares to the trustee Olympia and not to the beneficiary annuitant (para 29).  Olympia, as trustee, had the power of possession, title, and management of the RRSP property, had control and possession over the monies used to make the purchase, and, in combination with the RRSP provisions of the ITA never permitting the Annuitant to become seized of the set to the extent of legal title and possession, was the only party that could be the purchaser of underlying trust property (para 30-32).  Olympia was the purchaser under 116(3).

The Court referred to Prevost Car Inc v R, 2008 TCC 231, and stated that “the true owner, where  no other party has material incidents of ownership, is a fortiori the beneficial owner” (para 33).  This was not the fact here.

Finally, the Court held that as trustee under an RRSP plan, Olympia was also the “purchaser” who “acquired” property from a non-resident for purposes of subsection 116(5).  This is independent of section 159 which deals with the personal tax liability, but rather section 116 deals with the vicarious liability of a purchaser and is both a charging provision and  a collection measure (para 39-40); RCI Trust (Trustee of) v MNR, 2009 FCA 373.

 – Sas Ansari, JD LLM PhD (exp)
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